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Guest Post: The Shoeshine Boy

Tyler Durden's picture




 

From FOFOA

The Shoeshine Boy

To set up this post I will share with you two brief predictions I
recently received by email. These were both in email blind copied to
large groups of recipients that included me. The two senders do not know
each other. In fact, their only connection is that they are both
supporters of my blog on the highest order, I know what they each do for
a living (very respectable), and I therefore hold them both in high
regard:

Email 1:
This is a very
orderly secular bull market. The bubble, that WILL come, is still about 2
or 3 inches to the right of the margin on the right side of this
chart...

Email 2:
Perhaps we
are talking about the first general realization among the investing
public that the Fed cannot/will not rescue us with their magic wands and
QEs… This may be it, the beginning of Stage 2 of gold's rally, where
the smart money starts moving in. Stage 3 is next when the shoeshine boy
tells you: Buy gold!

For those of you that don't know the
meaning of the shoeshine boy reference, JFK's father, Joe Kennedy
claimed that he knew it was time to get out of stocks in 1929 when he
received investing tips from a shoeshine boy. Ever since, the shoeshine
boy has been the metaphor for "time to get out"; for the end of the
mania phase in which everyone, even the shoeshine boy, wants in.

Joe Kennedy

Joe
Kennedy's credibility on this "bubble top calling" issue is bolstered
by the fact that from 1929 to 1935 his fortune went from $50 million to
$2.85 Billion in today's purchasing power. And the take-home lesson in
this story is that it is time to sell ANYTHING once the shoeshine boy is
recommending it. Because the next phase is the blow off phase where the
item in question comes crashing back down.

Bubble Phases

And
the fact that two of my favorite readers are now calling for an
eventual bubble in gold reminded me that it has been 9 ½ months since I
wrote Gold: The Ultimate Un-Bubble. Perhaps it is time for an update.

Now
I'll grant that the point in both of the quotes above was that we are
nowhere near the bubble top. And they were addressed to people that are
very jumpy when it comes to bubbles because they have been burned by a
couple bubbles in recent history. But even so, I think they expose a
fundamental misunderstanding of what is actually happening today.

How Gold will handle even the Shoeshine Boy

Before
I get into what is actually happening with gold today, I want to show
you WHY it is happening to gold. And WHY gold is different. There's a
unique thing that happens with gold. ANOTHER said it pretty clearly
(even if still a bit cryptic) in his very first post:

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

In
a future post I'll explain the context in which ANOTHER made this
statement because it portends vast changes in the international monetary
system directly in front of us. (Remind me of this. I was going to
include it here but the post grew too long even without it. :) But for
now, we need to look at why this statement is true. For this I turn to
John Law. Well, not the real John Law, but another pseudonymous blogger
like me using his name back in 2006:

An illustration

Let's start by comparing two hypothetical cases.

In case A, a million Americans decide right now to move all their savings into Dell stock, buying at the current market price no matter how high.

In case B, a million Americans decide right now to move all their savings into gold, buying at the current market price no matter how high.

In both cases, let's say each of these test investors has an average of $10,000 in savings. So we are moving $10 billion.

Neither gold nor Dell can instantly absorb $10 billion without considerable short-term increases in price. Because it would require us to predict precisely how other investors would react, we have no way to precisely compute the effects. But we can describe them in general terms.

In case A, the conventional wisdom is right. Our test investors should expect to lose a lot of money.

This is because Dell has a stable equilibrium price which is set by the market's estimate of the future earning power (price-to-earnings ratio) of this fine corporation. Because it is not the result of any new information about Dell's business, the short-term surge should not affect this long-term equilibrium.

Since there will almost certainly be a short-term price spike, many of the test investors will be buying at prices well above the stable equilibrium. In fact, the more investors we add to the test, the more each one should expect to lose. Doh!

But there is no way to apply this analysis to case B.

Precious metals have no price-to-earnings ratio. With gold formally demonetized (that is, with no formal link between gold prices and currencies such as the dollar, as there was until 1971), there is no stable way to price it. There is no obvious equilibrium to which the gold price must converge.

It is true that gold has industrial uses. It can be priced on the basis of industrial supply and demand. The conventional wisdom is that it is.

Thus we can say that gold, for example, is overvalued if gold miners are selling more gold than jewelry makers and other industrial users want to buy. At present (with gold near $700), they probably are. So if you follow this reasoning, the right investing decision is not to buy gold, but to sell it short.

But this just assumes that there is no investment demand for gold. On the basis of this assumption, it shows that gold is a bad investment. Therefore there should be no demand for it.

Therefore, when our case B investors put $10 billion into gold, that money has to be used to bid gold away from its current owners, many of whom already believe that the price of gold in dollars should be much higher than it is now.

So the result of case B is that the gold price will, as in case A, rise immediately. But it has no reason to fall back.

In fact, quite the opposite. Because the gold price is largely determined by investment demand, any increase in price is evidence of increasing investment demand. Mining production, noninvestment jewelry demand, and industrial use are relatively stable. Investment demand is a consequence of investors' opinion about the future price of gold - which is, as we've just noted, largely determined by investment demand.

This is not a circularity. It is a feedback loop. Austrian economists might call it a Misesian regression spiral.

Suppose you believe this. It's all well and good. But what does it really prove? Couldn't gold still be just another bubble?

And why should gold be a better investment because it has no earnings to price it by? This makes zero sense.

To answer these sensible objections, we need a few more tools.

Nash equilibrium analysis

The Nash equilibrium is one of the simplest and oldest concepts in game theory. (Nash is John Nash of A Beautiful Mind fame.)

In game theory jargon, a "game" is any activity in which players can win or lose - such as, of course, financial markets. And a "strategy" is just the player's process for making decisions.

A strategy for any game is a "Nash equilibrium" if, when every player in the game follows the same strategy, no player can get better results by switching to a different strategy.

If you think about it for a moment, it should be fairly obvious that any market will tend to stabilize at a Nash equilibrium.

For example, pricing stocks and bonds by their expected future return (the standard Wall Street strategy of value investing) is a Nash equilibrium. No market is infallible, and it's possible that one can make money by intentionally mispricing securities. But this is only possible because other players make mistakes.

(Nash equilibrium analysis of financial markets is not some great new idea. It is standard economics. The only reason you are reading a Nash equilibrium analysis of the interaction between precious metals and official currency now on the Web, not 30 years ago in the New York Times, is that the Times gets its economics from real economists, not random bloggers, and the profession of economics today is deeply tied to the institutions that manage the global economy. Real economists do not, as a rule, spend time thinking up clever new reasons why the global financial system will inevitably collapse. They're too busy trying to prevent it from doing so.)

What Nash equilibrium analysis tells us is that the "case B" approach is interesting, but inadequate. To look for Nash equilibria in the precious metals markets, we need to look at strategies which everyone in the economy can follow.

Let's focus for a moment on everyone's favorite, gold. One obvious strategy - let's call it strategy G - is to treat only gold as savings, and to value any other good either in terms of its direct personal value to you, or how much gold it is worth.

For example, if you followed strategy G, you would not think of the dollar as worthless. You would think of it as worth 45 milligrams, because that's how much gold you can trade one for.

What would happen if everyone in the world woke up tomorrow morning, got a cup of coffee, and decided to follow strategy G?

They would probably notice that at 45mg per dollar, the broad US money supply M3, at about $10 trillion, is worth about 450,000 metric tons of gold; that all the gold mined in human history is about 150,000 tons; and that official US gold reserves are 8136 tons.

They would therefore conclude that, if everyone else is following strategy G, it will be difficult for everyone to obtain 45mg of gold in exchange for each dollar they own.

Fortunately, there is no need to follow the experiment further. Of course it's not realistic that everyone in the world would switch to strategy G on the same day.

The important question is just whether strategy G is stable. In other words, is it a realistic possibility that everyone in the world could price all their savings in gold? Is strategy G in fact a Nash equilibrium?

There are no market forces that would tend to destabilize it. Or are there? Actually, it turns out that we've skipped a step in our little analysis.

Levitating collectibles

The problem is that the exact same analysis works just as well for any standardized and widely available asset.

For example, let's try it with condoms. Our benchmark of all value will be the standard white latex condom. We can have a "strategy C" in which everyone measures the worth of all their assets in terms of the number of condoms they exchange for. Cash payments will be made in secure electronic claims to allocated boxes of condoms, held in high-security condom vaults in the condom district of Zurich. And so on.

This is obviously ridiculous. But why? Why does the same analysis seem to make sense for gold, but no sense for condoms?

It's because we've ignored one factor: new production.

Let's step back for a moment and look at why people "invest" in gold in the first place. Obviously they expect its price to go up - in other words, they are speculating. But as we've seen, in the absence of investment the gold price would be determined only by industrial supply and demand, a fairly stable market. So why does the investment get started in the first place? Does it just somehow generate itself?

What's happening is that the word "investment" is concealing two separate motivations for buying gold.

One is speculation - a word that has negative associations in English, but is really just the normal entrepreneurial process that stabilizes any market by pushing it toward equilibrium.

The other is saving. We can define saving as the intertemporal transfer of wealth. A person saves when she owns valuable goods now, but wishes to enjoy their value later.

The saver has to decide what good to hold for whatever time she is saving across. Of course, the duration of saving may be, and generally is, unknown.

And of course, every saver has no choice but to be a speculator. The saver always wants to maximize her savings' value, as defined by the goods she actually intends to consume when she uses the savings. For example, if our saver is an American retiree living in Argentina, and intends to spend her savings on local products, her strategy will be to maximize the number of Argentine pesos she can trade her savings for.

Here are five points to understand about saving.

One is that since people will always want to shift value across time, there will always be saving. The level of pure entrepreneurial speculation in the world can vary arbitrarily. But saving is a human absolute.

Two is that savers need not be concerned at all with the direct personal utility of a medium of saving. Our example saver has little use for a big hunk of gold. Her plan is to exchange it for tango lessons and huge, delicious steaks.

Three is that from the saver's perspective, there is no artificial line between "money" and "non-money." Anything she can buy now and sell later can be used as a medium of saving. She may have to make two trades to spend her savings - for example, if our saver's medium of saving is a house, she has to trade the house for pesos, then the pesos for goods. If she saves directly in pesos, she only has to make one trade. And clearly trading costs, as in the case of a house, may be nontrivial. But she just factors this into her model of investment performance. There is no categorical distinction.

Four is that if any asset happens to work well as a medium of saving, it may attract a flow of savings that will distort the "natural" market valuation of that asset.

Five is that since there will always be saving, there will always be at least one asset whose price it distorts.

Let's see what happens when that asset is condoms. Suppose everyone in the world does adopt strategy C, just as in our earlier example they adopted strategy G. What will happen?

Just as we predicted with gold, there will be massive condom buying. Since condom manufacturers were not expecting their product to be used as a store of wealth, demand will vastly exceed supply. The price of condoms will skyrocket.

Strategy C looks like a self-fulfilling prophecy. Condoms will indeed become a costly and prized asset. And the first savers whose condom trades executed will see the purchasing power of their condom portfolios soar. This is a true condom boom.

Let's call this effect - the increase in price of a good because of its use as a medium of saving - "levitation."

Sadly, condom levitation is unsustainable. The price surge will stimulate manufacturers to action. Since there is no condom cartel - anyone can open a factory and start making condoms - the manufacturers have no hope of maintaining the levitated condom price. They will produce as many condoms as they can, as fast as possible, to cash in on the levitation premium.

Levitation, in other words, triggers inventory growth. Let's call the inventory growth of a levitated good "debasement." In a free condom market, debasement will counteract levitation completely. It will return the price of a condom to its cost of production (including risk-adjusted capital cost, aka profit). In the long run, there is no reason why anyone who wants condoms cannot have as many as he or she wants at production cost.

Of course, condom holders will realize quickly that their condoms are being debased. They will pull their savings out, probably well before debasement returns the price of a condom to the cost of producing one.

We can call the decrease in price of an asset due to the flow of savings out of it "delevitation." In our example, debasement causes delevitation, but it is not the only possible cause - savings can move between assets for any number of reasons. If savers sell their condoms to buy Google stock, the effect on the condom price is exactly the same.

Because condom debasement is inevitable, and will inevitably trigger delevitation, savers have a strong incentive to abandon strategy C. This means it is not a Nash equilibrium.

The whole sad story will end in a condom glut and a condom bust. The episode will be remembered as a condom bubble. In fact, if we replace condoms with tulips, this exact sequence of events happened in Holland in 1637.

So why won't it happen with gold?

The obvious difference is that gold is an element. Absent significant transmutation or extraterrestrial trade, the number of gold atoms on Earth is fixed. All humans can do is move them around for our own convenience - in other words, collect them. So we can call gold a "collectible."

Because it cannot be produced, the price of a collectible is arbitrary. It is just a consequence of the prices that people who want to own it assign to it. Obviously, the collectible will end up in the hands of those who value it highest.

Since the global bullion inventory is 150,000 tons, and 2500 tons are mined every year, it is easy to do a little division and calculate a current "debasement rate" of 1.66% for gold.

But this is wrong. Gold mining is not debasement in the same sense as condom production, which does not deplete any fixed supply of potential condoms. In fact, it only takes a mild idealization of reality to eliminate gold mining entirely.

Gold is mined from specific deposits, whose extent and extraction cost geologists can estimate in advance. In financial terms, gold "in the ground" can be modeled as a call option. Ownership of X ounces of unmined gold which will cost $Y per ounce to extract is equivalent to a right to buy X ounces of bullion at $Y per ounce.

Since this ownership right can be bought and sold, just as the ownership of bullion can, why bother to actually dig the gold up? In theory, it is just as valuable sitting where it is.

In the form of stock in mining companies which own the extraction rights, unmined gold competes with bullion for savings. Because a rising gold price makes previously uneconomic deposits profitable to mine - like options becoming "in the money" - the total value of all gold on earth does increase at a faster rate than the gold price. But the effect is not extreme. 2006 USGS figures show 30,000 tons of global gold reserves. This number would certainly increase with a much higher gold price - USGS reports 90,000 tons of currently uneconomic "reserve base" - but the gold inventory increase would be nowhere near proportional to the increase in price.

In practice, modeling unmined gold as options is too simple. Gold discovery and mining is a complex and political business. The important point is that rises in the gold price, even dramatic rises, propagate freely into the price of unmined gold and do not generate substantial surges of new gold. For example, the price of gold has more than doubled since 2001, but world gold production peaked in that year.

The result is that gold can still levitate stably. Even if new savings flow into gold stops entirely, debasement will be mild. The cyclic response typical of noncollectible commodities such as sugar (or condoms), or theoretical collectibles whose sources are not in practice scarce (such as aluminum) is unlikely.

Of course, if savings flow out of gold for their own reasons, it can trigger a self-reinforcing panic. Delevitation is not to be confused with debasement. Again, it is important to remember that debasement is not the only cause of delevitation.

What we have still not explained is why gold, which is clearly already levitated, should spontaneously tend to levitate more, rather than either staying in the same place or delevitating. Just because gold can levitate doesn't mean it will.

Money in the real world

In case it's not obvious, what we've just done is to put together a logical explanation of money, using gold as an example, and using only made-up terms like "collectible" and "levitation" to avoid the trap of defining money in terms of itself.

Now let's apply this theory to the money we use today - dollars, euros, and so on.

Today's official money is an "artificial collectible." Money production is limited by legal violence, not natural rarity. If in our condom example, the condom market was patrolled by a global condom mafia which got medieval with any unauthorized condom producers, it would resemble the market for official currency. No one can print Icelandic kronor in the Ukraine, Australian dollars in Pakistan, or Mexican pesos in Algeria.

It may be distasteful to hardcore libertarians, but this method of controlling the money supply is effective. There is minimal unlicensed production of new money - also known as counterfeiting.

It should also be clear from our discussion of gold that there is nothing, in principle, wrong with artificial paper money. The whole point of money is that its "real value" is irrelevant. In principle, an artificial money supply can be much more stable than a naturally restricted resource such as gold.

In practice, unfortunately, it has not worked out that way.

Artificial money is a political product. Its problems are political problems. It does no one any good to separate economic theory from political reality.

Governments have always had a bad habit of debasing their own monetary systems. Historically, every monetary system in which money creation was a state prerogative has seen debasement. Of course, no one in government is unaware that debasement causes problems, or that it does not create any real value. But it often trades off short-term solutions for long-term problems. The result is an addictive cycle that's hard to escape.

Most governments have figured out that it's a bad idea to just print new money and spend it. Adding new money directly to the government budget spreads it widely across the economy and drives rapid increases in consumer prices. Since government always rests on popular consent, all governments (democratic or not) are concerned with their own popularity. High consumer prices are rarely popular.

There is an English word that used to mean "debasement," whose meaning somehow changed, during a generally unpleasant period in history, to mean "increase in consumer prices," and has since come to mean "increase in consumer prices as measured, through a process whose opacity makes chocolate look transparent, by a nonpartisan agency whose objectivity is above any conceivable question, so of course we won't waste our time questioning it." The word begins with "i" and ends with "n." Because of its interesting political history, I prefer to avoid it.

It should be clear that what determines the value of money, for a completely artificial collectible with no industrial utility, is the levitation rate: the ratio of savings demand to monetary inventory. Increasing the monetary inventory has a predictable effect on this calculation. Consumer price increases are a symptom; debasement is the problem.

Debasement is always objectively equivalent to taxation. There is no objective difference between confiscating 10% of existing dollar inventory and giving it to X, and printing 11% of existing dollar inventory and giving it to X. The only subjective difference is the inertial psychological attachment to today's dollar prices, and this can easily be reset by renaming and redenominating the currency. Redenomination is generally used to remove embarrassing zeroes - for example, Turkey recently replaced each million old lira with one new lira - but there is no obstacle in principle to a 10% redenomination.

The advantage of debasement over confiscation is entirely in the public relations department. Debasement is the closest thing to the philosopher's stone of government, an invisible tax. In the 20th century, governments made impressive progress toward this old dream. It is no accident that their size and power grew so dramatically as well. If we imagine John F. Kennedy having to raise taxes to fund the space program, or George W. Bush doing the same to occupy Iraq, we imagine a different world.

The immediate political problem with debasement is that it shows up in rising consumer prices, as whoever has received the new money spends it. If we think of all markets as auction markets, like EBay, it should be clear how this happens.

Debasement and investment

We haven't even seen the most pernicious effect of debasement.

Debasement violates the whole point of money: storage of value. As such, it gives savers an incentive to find other assets to store their savings in.

In other words, debasement drives real investment. In a debasing monetary system, savers recognize that holding money is a loser. They look for other assets to buy.

The consensus among Americans today is that monetary savings instruments like passbook accounts, money market funds, or CDs are lame. The real returns are in stocks and housing. [Written in 2006]

When we debasement-adjust for M3, we see the reasons for this. Real non-monetary assets like stocks and housing are the only investments that have a chance of preserving wealth. Purely monetary savings are just losing value.

The financial and real estate industries, of course, love this. But that doesn't mean it's good for the rest of us.

The problem is that stocks and housing are more like condoms than they are like gold. When official currency is not a good store of store value, savings look for another outlet. Stocks and housing become slightly monetized. But the free market, though it cannot create new official currency or new gold, can create new stocks and new housing.

The result is a wave of bubbles with an unfortunate resemblance to our condom example. When stocks are extremely overvalued, as they were in 2000, one sign is a wave of dubious IPOs. When housing is overvalued, we see a rash of new condos. All this is just our old friend, debasement.

This debasement pressure answers one question we asked earlier: why should gold tend to levitate, rather than delevitate? Why is the feedback loop biased in the upward direction?

The answer is just that the same force is acting on gold as on stocks and housing. The market is searching for a new money. It will tend to increase the price of any asset that can store savings.

The difference between precious metals and stocks or housing is just our original thesis. Stocks and housing do not succeed as money. Holding all savings as stocks or housing is not a Nash equilibrium strategy. Holding savings as precious metals, as we've seen, is.

Presumably the market will eventually discover this. In fact, it brings us to our most interesting question: why hasn't it already? Why are precious metals still considered an unusual, fringe investment?

The politics of money

What I'm essentially claiming is that there's no such thing as a gold bubble.

This assertion may surprise people who remember 1980. But markets do not, in general, think. Most investors, even pros who control large pools of money, have a very weak understanding of economics. The version of economics taught in universities has been heavily influenced by political developments over the last century. And your average financial journalist understands finance about the way a cat understands astrophysics.

The result is that historically, the market has had no particular way to distinguish a managed delevitation from an inevitable bubble. Because of Volcker's victory, and the defeat of millions of investors who bet on a dollar collapse, the financial world spent the next twenty years assuming that there was some kind of fundamental cap on the gold price, despite the lack of any logical chain of reasoning that would predict any such thing.

Even now, there is no shortage of pro-gold writers who predict gold at $1000, $2000 or $3000 an ounce, as though they had some formula, like the P/E ratio for stocks, that computed a stable equilibrium at this level. Of course, they do not. They are only expressing their intuitive feeling that gold is very, very cheap right now, and tempering it with the desire to be taken seriously.

Gold's main weapon is one we alluded to already: a sudden, self-reinforcing, and complete collapse of the dollar. In a nutshell, the problem with the dollar is that it's brittle. When Volcker did his thing, the US was a net creditor nation with a balance-of-payments surplus. Its financial system was relatively small and stable. And it had much more control over the economic policies of its trading partners - the political relationship between the US and China is very different from the old US/Japanese tension.

For the Fed, what is really frightening is not a high gold price, but a rapid increase in the gold price. Momentum in gold is the logical precursor to a self-sustaining gold panic. If the US federal government was a perfectly executed and utterly malevolent conspiracy to dominate the world, let's face it. The world wouldn't stand a chance. In reality, it's neither. So a lot of things happen in the world that Washington doesn't want to see happen, and that it could easily prevent. Anticipating surprises is not its strength. [1]

Holy
Cannoli, Batman! I think this is the longest "snip" I've ever used in a
post. Nine pages in Word, just for that quote. And I even edited several
pages out of it, "to tighten it up!" I hope you enjoyed it.

To
recap, a rising gold price is evidence of increasing investment demand,
which confirms the belief of those that already invested in gold that it
was a good investment. And because investment demand is over and above
the relatively stable industrial supply and demand dynamic, any new
investment dollars must bid gold away from its current owners. And
because saving in gold is a Nash Equilibrium, the price will rise very
high. And because gold is THE monetary metal with the highest monetary
to industrial use ratio, it will have no reason to fall back when it
reaches its top.

And, as ANOTHER said, "So many people worldwide think of it as money, it tends to dry up as the price rises."

Stock, Flow, Supply and Demand

Let's
try a little thought experiment and see where it leads us. This might
be a bit of a mind bender and a challenge for me to articulate, but what
the heck, we're already 11 pages into this thing. Why stop now?

Let's
think of all the physical gold in the world in the same terms as our
price discovery markets classify the gold they hold secure for private
parties. (You do know that the gold for sale does not belong to the
exchanges, don't you?) There is that gold which is "eligible" for
delivery. And in our experiment this would be all the physical gold in
the world. It is ALL "eligible" to be handed to someone else in exchange
for something else. (The only requirement for eligibility in our
thought experiment being that it is a physical object made of gold.) And
then there is the gold that is actually "registered" for delivery. In
our case this would be the gold that is up for sale or expected to go up
soon.

So "eligible" is the "stock" and "registered" (for
delivery) is the "flow," sort of. (Yes, I know that flow would mean the
gold coming out of the ground and then being used up in jewelry and
electronics if gold was like other commodities, but it's not, so get
over it.)

Now what I just wrote is not entirely correct. You
cannot simply compare stock to flow like that because they have
different measuring units. Flow is measured in units/time and stock is
just units. They do not and cannot compare. The only meaningful
relationship they have is a ratio. Stock:Flow, or units/(units/time),
which = time. This yields us a time value in which the flow will deplete
the stock. So "our flow" is the amount of "registered" gold that
actually gets delivered in exchange for something over a given time
unit.

In the world as a whole, gold has the largest stock to flow
ratio of any commodity, which is why it is unique. This means a very
high time value for the depletion of gold stocks. In fact, it is an
infinite time value since gold is not consumed, it is merely shuffled
around until it ends up with those who value it most. So in our case
we'll think of flow as delivery demands actually being met with
"registered" stock over a period of time. And in this view, "stock to
flow" is a dynamic system that is complicated by many factors.

One
complication is that, today, physical and paper gold exist as "stock"
at par with each other inside the system. And the flow of paper happens
prior to the flow of physical stock (on the price discovery exchanges).
In other words, price is discovered in paper and then delivery comes
later. Price is not discovered at the physical delivery window. In fact,
whether there is any physical at that window when you finally show up
with your paper depends on dynamic changes that happened earlier.

As
the paper flow precedes the physical flow, the supply and demand
dynamics can change very fast, perhaps even so fast as to give the
impression that they traveled faster than the speed of light like a tachyon,
went back in time, and originated in the past! (Making them impossible
to get out in front of!) As demand increases while registered gold is
depleted and/or deregistered one of two things must happen. Either the
price must skyrocket or the supply of paper must explode to take up the
slack.

And as either of these things happen – or they both happen
together – we end up with John Law's self-sustaining Misesian
regression spiral. Where today's demand is determined by yesterday's
performance. (We can call it "the tachyon effect" if you'd like.) This
applies to both physical gold and paper gold, and the feedback loop will
have separate effects on these separate elements of the market. It will
be the cause of the separation and the result will be a flood of paper
and no registered gold to service the delivery demand portion of it.

Ultimately
the stock to flow ratio of physical gold will go inverse to that of
paper gold. Infinite flow demand against zero registered stock. Zero
time until physical depletion, concurrent with infinite time until paper
depletion. At this point the price will have to go infinite and paper
supply will separate because parity will no longer exist.

And in
case you haven't noticed, we are now, apparently, at a novel stage in
the game. The stage when it is becoming obvious to almost everyone that
the Fed can do nothing but print more money (QE), and that it plans to
do just that. I draw your attention to gold trading at $1,301 today as
evidence! And regarding the Fed, what does a monkey with a hammer do?
That's right. It hurts itself.

Being at this stage in the game
right now, when clarity is spreading like wildfire, we can expect a
further run up in the price of paper gold. Of course the price discovery
market buys and sells paper gold so a move in either direction is
possible in the short run, but the general trend in gold should now be
obvious, even to monkeys. And don't forget that delivery of physical in
this market is secondary, and only comes after price discovery occurs in
paper.

So with this dynamic situation we find ourselves in, we
should expect conflicting signals and responses in the gold market. The
flow of gold should increase as demand from dollars pulls on the market.
And the supply of gold bullion should be withdrawn or "deregistered" as
the people holding it realize their investment belief has been
confirmed.

From a demand perspective, flow should increase per
the economic law of demand. And from a supply perspective, it should
decrease. But how is this possible? Well, this is where price factors
into the dynamics of the situation. In most commodities (and all other
markets for that matter) flow would be measured in the weight of the
good. "How many ounces are flowing?" But gold is a little different.

Because
gold is behaving in this case primarily as a savings instrument, flow
can be measured in the amount of savings being exchanged. Just like
exchanging dollars for euros. In other words, to properly judge the flow
we should look at the aggregate amount of wealth flowing "into" gold
rather than the weight of gold changing hands. And in this view, the
flow can increase with demand even as the stock is withdrawn. Price
takes up the slack. It can even accommodate the shoeshine boy without
threatening a top.

But there's another element in this dynamic
situation that must be considered. And that is paper gold. As I said,
price discovery occurs in paper only, and delivery comes after the fact.
So paper supply creation can easily absorb the pressure of increasing
demand while relieving price of its "taking up the slack" burden.

However,
unless the ratio of physical stock "registered" to become flow rises
along with the creation of new paper gold, well, "Houston, we've got a
problem." And I'm talking about registered physical stock measured in
weight, not value! Which is QUITE a problem!

Fortunately, to
quote John Law (not the real one), there is no need to follow this
challenging scenario further. Instead, we can just repeat ANOTHER's line
once again:

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

In
economic terms, ANOTHER was referring to gold's price inelasticity of
supply here. In other words, gold seems to violate the economic law of
supply. As the price rises, the supply dries up.

But another
funny thing also happens when gold "tends to dry up as the price rises."
Even more people join the "many people worldwide that think of it as
money." And this means that gold violates the economic law of demand as
well, delivering a positive price elasticity of demand. In other words,
gold is a Veblen good.
But unlike a Rolls or the Mona Lisa, gold is divisible and fungible
making it the Veblen good that puts the common man on equal footing with
the Giants!

This is what FOA meant:

In
this world we all need much; blessings from above,,,,, family,,,,
home,,, friends and good health. But after all that, one must have
currency and an enduring, tradable wealth asset that places our footing
in life on equal ground with the giants around us,,,,,, gold!

And this is how and why gold WILL accommodate even the shoeshine boy without collapsing!

There is no such thing as a physical gold bubble.

So,
to wrap this beleaguered post up, let's just say that we have the
distinct makings of a parity break between paper and physical gold in
the works. The supply of paper gold must rise while the supply of
physical is withdrawing (deregistering). The flow must also rise, at
least in nominal terms, so the price will skyrocket to take up the
slack. And as expanding paper competes with a rising price for the
"slack taking-up" role, who do you think will win?

Could they
each have their way? Could the price rise to take up the extra demand
while supply contracts at the same time as easy paper dilution wins
itself a lower price? Confused yet?

Well, this situation leaves
us with an uncomfortable question. If the only price of gold we know
today is the price of paper gold, what is going to happen to "the price
of gold?" Will it skyrocket? Or will it plummet?

And if we apply
the principles learned in John Law's amazingly long piece in a logical
way to this uncomfortable predicament, we'll find ourselves at the
conclusion that the true Nash Equilibrium is to take possession of
physical gold. And, if you already have some, not to sell it while the
price is rising OR falling (this time).

And with the supply of
paper gold rising to meet demand while physical is being withdrawn, the
only conclusion we can come to is that the gold buyers **IN SIZE** will
have to stop buying from the price discovery marketplace because, if
they do their due diligence, they'll clearly see that subsequent
physical delivery has become impossible at the present price.

So, in conclusion, the price of gold will plummet!

That's
right. At some point in the future, after the price of gold rockets
upward, it will fall like a box of rocks! And right about that time
you'll see more of Robert Prechter on CNBC than you ever thought was
possible.

But here's the challenge. When the price of gold falls
to $200 per ounce, try and get some physical. I'm sure that Kitco will
sell you some from their pooled account. And GLD will be standing ready
to sell you a share at $20. But just try to take delivery. I think
you'll find it will be impossible at that point.

And that's why
you've got to take delivery NOW, at the current "high" price of $1,300.
Don't wait for the dip. Oh, yeah, the big dip is definitely coming. A
**BIG** "correction." But will there be any physical available? Perhaps
at $1,200 if you're really lucky. At $200? No way.

When I look into MY crystal ball, here is how I see a future gold price chart developing (roughly, of course):


And with that, I'll leave you with my replies to the email at the top:

My reply to email 1:
Is this an orderly bull market in paper gold or physical gold?

The bubble that "WILL come"... will it be in paper gold or physical gold?

Is there a difference between paper gold and physical gold?

Is your chart showing paper gold or physical gold?

My reply to email 2:
You
may be right on stage 2. But my gut says that stage 3 is when it's
obvious everyone's flooding into gold and the real physical **IN SIZE**
decides its best move is to withdraw from delivery registration. At that
point the paper market won't be able to handle the flood.

My bet, when the shoeshine boy tells you to buy gold he'll be talking about small gold coins only.
GLD probably won't even exist anymore. And in this unique historical
case, the shoeshine boy will not be the bad omen of a bubble top mania
phase, but he will instead be the amazing bell-ringer of a new era. One
in which even shoeshine boys can save their surplus wealth in gold. One I
like to call Freegold. Because a physical-only gold market can actually
handle everyone PLUS the shoeshine boy, unlike any other market.


Sincerely,
FOFOA

 

[1] From Why the Global Financial System is About to Collapse
by John Law
Edited by me for length and content.

 

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Sat, 09/25/2010 - 12:20 | 604276 cirrus
cirrus's picture

Nice...

Sat, 09/25/2010 - 13:18 | 604331 Ignatius
Ignatius's picture

"And regarding the Fed, what does a monkey with a hammer do?  That's right. It hurts itself."

FOFOA is priceless

Sun, 09/26/2010 - 00:42 | 605124 Alexandre Stavisky
Alexandre Stavisky's picture

There is no component of monetary transaction so necessary as morality.  That one agent may completely exchange with another completely, without subtlety, innuendo, winnowing attainder, or smallest reservation.  That both meet make durable comparison and equal trade and part, without any further engagement is the quintessential act of perfect trade.

But small men cannot allow such perfect exactitude.  They must find ways to control not only the unit of account, but also must monitor and exact tax upon each and every capability of man that makes a switch that furthers his material comfort.  Small men must control the most perfect commodity used which SHOULD hold indefinitely the summations of his exchange.  And then they corrupt and make fast half-life degradation of it.  Next, they learn the careful ability of holding their fellow (but infinitely duller) neighbors in annual servitude.  This they do by both condemning their fellow by the law if he does not offer up tribute to the state yearly of whatever paltry gains he may make by sweat and blood, also they do so by by issuing (without the citizen's EVERY consent) new bonds of differing duration which claims upon his futurative labour.  This shall be torn from his economic body whether he is ready or no.

The men who seem most readily able for such a mercenary performance are those who are supposed to espouse the highest of high ideal.  These are the men of high state, supposed of purest motives, without personal thought, whose every purpose and, indeed, devotion should be to the betterment of their fellow men.

To bad that this is a lie.

They seek office for vanity and riches.  They suborn the idyllic laws to obtain that which is not inherently within them.

They promise far beyond their capacity to deliver.  Their promises, built upon broken backs of the yeomen who (ignorant of their treacherous barter) believe in the gilded guiding lights of a constitution or bill of rights, are subtracted from those who virtuously act to better their lives and those under their husbandry.  The malefactors, by their subterfuge, are enriched (but never satisfied) while the good find their stores raided, their ample labour made suddenly unsatisfactory for durable existence.

Those whose existence is pretenced upon stewarding the storehouses of all, and whose earliest nursings were in the mother's milk of Judeo-Christianity, lately seem to spurn the simplest of black law.  THOU SHALT NOT STEAL.  Thou shalt not debase.  Thou shalt not sneak, nor take without equal exchange.  Thou shalt not make uneasy, the populace who depend upon you to safeguard their stores.  Thou shalt not deprive they neighbor of his substance.  Thou shalt not try to mask the insolvency which long arrogance against the laws of GOD and man have brought you to.  Thou shalt not seek to place the want of idleness upon thy industrious neighbor.  Thou shalt not seek to obtain abundance in excess of the possible.

This nation and many of its inhabitants have unwittingly imbibed from a fouled fountain.  That fountain is the same as Sodom and Gomorrah.  Its art and downfall was in taking riches not earned by setting foottraps and snares for the unaware wayfarer.  Making and innocent sin and defile himself against the law in order that the snaresetter may strip him of his goods--and possibly set him wounded in an infrequented road.  This is their art.  This is their means of attaining a marketbasket.  THIS IS AN ABOMINATION TO HE WHO PUT THEM UPON THIS TINY BLUE STONE.

This is the policy and urgent work that the central bankers about the world enact.

IT IS INIQUITY.

Put the balance sheet right.  Liquidate that which must be.  Let the chips fall where they may.

Usury has always been proscribed in all holy literature.  Kick against the pricks as they try, they cannot remake the old laws.

Bankruptcy must be declared.  The wound must be endured.  The healing begins only when the fullness has been suffered.

Otherwise it is maelstrom, limbo, zombification, a world of never movement.

Sun, 09/26/2010 - 13:13 | 605615 DoChenRollingBearing
DoChenRollingBearing's picture

Alexandre, that was fantastic!

Live long, prosper and post often.

Sun, 09/26/2010 - 22:48 | 606395 flacon
flacon's picture

I just read this. It is AWESOME! 

Sun, 09/26/2010 - 23:00 | 606414 flacon
flacon's picture

I just read this. It is AWESOME! 

Sat, 09/25/2010 - 14:00 | 604394 sgt_doom
sgt_doom's picture

Hmmm....I suspect that brilliant crime boss, Joe Kennedy, who flunked out of high school but somehow managed to scam an academic scholarship to Harvard, and was at that time -- prior to his entrance as a trader on The Street -- the youngest bank president in US history, might have been a bit more conversant with the true financial picture.

The Prohibition, lasting from 1920 to 1933, and financed nationally by the same group which would later finance and promote its repeal (after they'd reaped their financial rewards, of course!), was an excellent criminal monopoly on alcohol distribution within the USA.

Of course, once massive profits were realized from smuggling and bootlegging (while they were financing the Prohibition legislation, they had been buying up, or strongarming into selling, the majority of distilleries and hootches around America), those monies were most likely laundered through the stock exchange.

Old Joe knew the score, as he was reputed to have been the mastermind behind the master plan to begin with.

With the repeal of Prohibition in 1933, that major tax cut (quite similar to tax cuts on the super-rich today) which would have came about from the legitimate selling of alcohol, was rescinded.

That plan would serve as the template for a future plan, where trillions would be offshored to hedge funds, then those monies, leveraged from securitized financial instruments in a shell game and bait-and-switch strategy, would then be used to buy up America after its meltdown in 2007 -- 2009, and continuing deleveraging.

History does repeat itself, after all......

Sat, 09/25/2010 - 14:18 | 604430 Monkey Craig
Monkey Craig's picture

plus I believe that ole Joe Kennedy was the first head of the SEC. when you combine this fact with the former head of the CIA (George Bush), you realize that these bureaucrats are creating some type of technological dictatorship.

Sat, 09/25/2010 - 15:15 | 604502 New_Meat
New_Meat's picture

FDR really didn't like ol' Joe, appointed him to head the first SEC and when challenged by some of his blue-blood friends said "set a thief to catch a thief." e.g. http://www.gwu.edu/~erpapers/mep/displaydoc.cfm?docid=erpn-jpk

Horseneck beach in So. Mass. is as pretty as ever; great trans-shipment point for Joe's illegal hooch.

- Ned

Sat, 09/25/2010 - 15:03 | 604486 merehuman
merehuman's picture

sorry about cutting in front. Just heard the 82 nd airborne on alert for domestic operations. Something imminent. Soldiers were told to have stuff ready. Having been in the army years ago i recall that once on alert a soldier must remain within company area. No weekend pass.

Hope i am wrong but this could be prep for bankholiday this weekend. I dont know, am researching  it now.

Sat, 09/25/2010 - 15:21 | 604509 TheGoodDoctor
TheGoodDoctor's picture

Interested to hear more. Thanks merehuman.

Sat, 09/25/2010 - 15:26 | 604513 New_Meat
New_Meat's picture

Drudge finally has the Credit Union story, nothing on this.  82nd used to have an alert battalion(+) all the time with companies on 4, 8, 12 hour go status.  Doubt if it is a brigade-sized alert.

- Ned

Sat, 09/25/2010 - 16:26 | 604600 SDRII
SDRII's picture

More color?

Sat, 09/25/2010 - 17:57 | 604683 Slewburger
Slewburger's picture

merehuman.

Give this a look.

http://www.youtube.com/watch?v=trsXn5lrjdU

 

Sat, 09/25/2010 - 18:56 | 604733 merehuman
merehuman's picture

Thanks slewburger, wll do. Am as concerned as you are.Perhaps its a nothingburger but in times like these...

Sun, 09/26/2010 - 00:19 | 605101 Slewburger
Slewburger's picture

merehuman,

Guy got so many hits his view counter stopped updating... stuck on 302 same as this morning.

And either google or the uploader delisted the video from the public. Strange.

Sun, 09/26/2010 - 09:20 | 605351 Turd Ferguson
Turd Ferguson's picture

Can someone please explain to me why this video has been removed from youtube? It was there last night.

Sun, 09/26/2010 - 10:16 | 605374 Grifter
Grifter's picture

Hey Turd,

Several folks made copies...if this one doesn't work try searching "Homeland Mobilization" on youtube.

http://www.youtube.com/watch?v=kO5iIsYvJ6E

EDIT: Jesus I'm an idiot, Turd, my dyslexia read that as a request to explain what was contained...guess I'll leave it up for anyone else who might be interested...

Sun, 09/26/2010 - 11:27 | 605484 Turd Ferguson
Turd Ferguson's picture

Thanks, Grif.

I admit to being gullible and this things got me a little concerned. Not going to let it ruin my Sunday but senses are heightened, to say the least. 

Sat, 09/25/2010 - 18:58 | 604737 merehuman
merehuman's picture

smokenjoe is for real, straight up guy.

Sat, 09/25/2010 - 20:56 | 604836 TheGoodDoctor
TheGoodDoctor's picture

That is fucked up SDRII. Interesting nonetheless.

Sat, 09/25/2010 - 22:57 | 605003 spankerfc
spankerfc's picture

Smells like a cunt's trick or false flag in your common parlance. TPTB testing to see how far things quickly things go viral before the SHTF. You can't blame them they wouldn't want to be caught cold during the real event now would they? After all Twitter - you Tube etc, wasn't around during 9/11

Keep up the good work guys this site man. Quality.

 

 

 

 

Sat, 09/25/2010 - 23:26 | 605052 Turd Ferguson
Turd Ferguson's picture

What in the fuck is going on?

That is some seriously weird stuff. The Turd isn't easily startled but I may not sleep too well tonight.

Sun, 09/26/2010 - 00:38 | 605121 merehuman
merehuman's picture

Dammit i had a vision in my mind tonite that we are the last. In less than 20 years the remaining humans will struggle for scraps. Even the high and mighty are fucked now.The next thousand years humans alive and well ,will be a rarity.  Damn i hope i am wrong, but looking at all the vatious dilemmas hitting at once, wow. 3.1 in NH aint helpen. I feel like its all closing in and have been going for walks at 1 am to see the stars and feel the aliveness of the moment. If we are gonna go out, lets do it with a bang! Have fun, get and give hugs and do something nice for yourself.

Time in life was always short, lets have a little quality before we pass. I hope to raise my conciousness a little more before i go. I truly love you all as part of me is in you and vice versa.

Sun, 09/26/2010 - 04:50 | 605237 spankerfc
spankerfc's picture

I feel your love. Damn. I need some ecstasy though would short cut the distance to travel no end

Sat, 09/25/2010 - 17:54 | 604681 Michael Victory
Michael Victory's picture

Very...

Sat, 09/25/2010 - 12:27 | 604283 ConfederateH
ConfederateH's picture

Congrats Fofoa, you made it into one of Tyler's anchored posts.  You have hit the big time!

Sat, 09/25/2010 - 13:49 | 604369 DoChenRollingBearing
DoChenRollingBearing's picture

And about time!  Very good posting this Tyler!  Thank you!

FOFOA is offering each of us the solution (physical gold).  He tells us an endgame that may very well happen exactly as he predicts.

I don't know about you guys, but if gold DOES get that high (with or without the dis-continuity), I will sell some either there or along the way.  First sale will fund a containerload of yummy Japanese and Korean bearings for our company in Peru.  Second sale will be to BUY ALL OUR COMPETITORS down there!

Sat, 09/25/2010 - 14:02 | 604399 MsCreant
MsCreant's picture

So you aspire to be a Ball-Bearing Wallmart? :-)

Sat, 09/25/2010 - 14:05 | 604405 DoChenRollingBearing
DoChenRollingBearing's picture

No.  Even better, we want the franchise, the monopoly...!

Sat, 09/25/2010 - 15:01 | 604481 Hulk
Hulk's picture

send me 3 for the Ford....

Sat, 09/25/2010 - 20:58 | 604838 Al Gorerhythm
Al Gorerhythm's picture

Until you're to big to fail I suppose.

Sat, 09/25/2010 - 14:25 | 604445 Pining for the ...
Pining for the Fjords's picture

Holy crap.   My two 'must read every word' sites are comingling.  Worlds are colliding, cats and dogs living together, utter chaos.

I guess that's just life in the fast paced, wham-bam, live on the razors edge, laugh in the face of death world of currency collapse.

Sat, 09/25/2010 - 15:18 | 604505 New_Meat
New_Meat's picture

nvm

Sat, 09/25/2010 - 16:29 | 604602 ConfederateH
ConfederateH's picture

It made me thing of this Dr. Hook classic, "On the cover of the Rolling Stone"

http://www.youtube.com/watch?v=-Ux3-a9RE1Q

Sat, 09/25/2010 - 12:35 | 604286 Segestan
Segestan's picture

Good post.... FOFOA is an intellectual giant.

Sat, 09/25/2010 - 12:41 | 604289 Dagny Taggart
Dagny Taggart's picture

So Robo is the Shoeshine boy pumping AAPL? Or we just want him to run home and get his feckin' shine box? I'm confused.  <sarc>

 

Love FOFOA too... I don't mean this in a dirty way, but you're on my blogroll.

Sat, 09/25/2010 - 13:26 | 604342 Andrew G
Andrew G's picture

I love FOFOA, both clean and dirrty

Sat, 09/25/2010 - 15:03 | 604485 Hulk
Hulk's picture

Robo just brings to us the reality of Fed pumping.....

doesn't understand PM's ...

Sat, 09/25/2010 - 12:43 | 604292 FranSix
FranSix's picture

Hi, I found it long to scroll through, let alone read it all.

Probably the best long term forecast for gold prices in € can be found here, all in German:

http://www.realterm.de/DAXinGold.php

I suppose the same exact method can be used as regards the Dow, in inflation adjusted terms.  And if its done correctly will very likely come up with a similar time frame and results.  A $50k+ gold price fix will cause massive inflation, btw, just as a $42/oz. gold price fix(the price fix in 1971 before the gold window closed) will cause massive deflation.  In fact, I would venture to say that attempting to fix the gold price below its floating value in the 1990's is probably cornerstone to the world financial crisis. (consider how a short of gold position was at the heart of the LTCM disaster, and how all of the players from that crisis had taken their place on the world stage during the financial crisis.)

A gold monthly chart with all of the inflation-adjusted price fixes demonstrates perhaps that a price fix is probably a major mistake, and that a floating gold price, with all of the fraudulent aspects of the price fixing regime removed is probably the best way:

http://stockcharts.com/h-sc/ui?s=$GOLD&p=M&b=5&g=0&id=p29560442230&a=182333562&listNum=2

Edit:  I was shining my shoes before coming across this post.  HOW THE HELL DID YOU FIND OUT?

Sat, 09/25/2010 - 14:21 | 604437 Millivanilli
Millivanilli's picture

If you are too stupid to read,  why post. 

Sat, 09/25/2010 - 14:30 | 604449 CrockettAlmanac.com
CrockettAlmanac.com's picture

He's not too stupid to read, he's too lazy to read. He's too stupid to not post.

Sat, 09/25/2010 - 14:46 | 604465 FranSix
FranSix's picture

There are other points of view within the inflationist space that do not require a gold price of $50k/oz.+.

Americans are, as a rule, rude and lost in the wilderness.

Sat, 09/25/2010 - 18:04 | 604689 bronzie
bronzie's picture

excuse me for being a rude American, FranzSix, but FUCK YOU until you bleed!

you admit to not reading the article but go on to reply to it and provide a link besides!

you don't have a personal interest in the link that you posted do you?

Sat, 09/25/2010 - 17:51 | 604676 Bananamerican
Bananamerican's picture

people buying phys gold already have their middle fingers raised to the FED.

What makes you think they will respond to a "fiat" re-pricing of gold by same?

our currency isn't backed by gold anymore...they might as well re-price the used car market by fiat.....

"All 2001 model Honda Accords shall not sell for more than $400"

Sat, 09/25/2010 - 23:48 | 605084 Ragnar D
Ragnar D's picture

They already do it with minimum wage, rent, electricity, water, public transit, medicine, and less directly through "antitrust" laws.

Do you really think the socialists don't want to extend the controls on everything else?  They are, at their core, control freaks.

Sat, 09/25/2010 - 20:22 | 604809 puckles
puckles's picture

FranSix,

I humbly suggest that you are confusing cause and effect in terms of gold prices. The $42/oz price in 71 was not tenable, because of all of the deficit spending during the Vietnam War.  This was understood throughout the financial community at the time, but only de Gaulle had the gall/balls/cojones to call Nixon on it (for de Gaulle, it was a type of war by other means, as well, but to parse that would take a book).  Why it is not known as the De Gaulle call is beyond me (well, perhaps because it's also the most well known failed call in the 20th century).  

Equally, a $50k/oz price of gold will only reflect--well, not inflation at that point, but hyperinflation, which is a complete loss in the value of the relevant currency.  Should that happen, and I am very much afraid that it is likely, God help us all.

So this post is really speaking yet again to the high possibility of hyperinflation.  Seems to be a theme here.

Sat, 09/25/2010 - 12:42 | 604293 NoVolumeMeltup
NoVolumeMeltup's picture

The first thing I thought of was Billy Batts telling Tommy to go home and get his f*ing shine box.

Hopefully Billy Batts is the modern banking system in this scenario.

Sat, 09/25/2010 - 12:43 | 604295 Ancona
Ancona's picture

Quite interesting commentary, and prescient too. What about silver folks? A guy like me can't afford to run out and load up on gold, but I can afford thirty or forty oz. of silver every couple of months. When gold has it's blow-out, silver will follow, and finally be restored to it's true equilibrium level of 15 to 1 with gold.

Sat, 09/25/2010 - 12:47 | 604300 Lndmvr
Lndmvr's picture

?  30 oz of silver = 1/2 oz of gold. Which is your call.

Sat, 09/25/2010 - 14:58 | 604476 l1xx3r
l1xx3r's picture

I hate to break it to you, but 15:1 silver:gold ratio is not really a good historic mesurement considering those were government mandated ratios and not free market ratios. Don't get me wrong, silver has a lot more up-side to go I'm 60:40 on my gold:silver investments, but I understand that in the end, gold will win out. Once manufacturing falls (especially of silver dependent electronics) that will effect the silver price. Also, if silver gets out-priced and manufacturing starts to suffer, they will just lobby the the gov to use lead again for the "good of the economy". Not to mention all the otehr uses for silver will eventually be priced out (like photography, biocide products, and so on). So people investing in silver will drop and so will the price (mostlikely still higher than 20/oz). The point is that gold is still going to be king, always has, always will be.

Sat, 09/25/2010 - 15:06 | 604490 Buckaroo Banzai
Buckaroo Banzai's picture

Not true. Silver occurs in nature about 16x more frequently than gold. The government mandated ratios were based on reality.

However, at any given moment in time, the ratio can get skewed. When the gigantic Nevada silver deposits were exploited in the 19th century, silver appeared in quantities far in excess of the average 16x ratio. Governments adapted by demonetizing silver in the late 19th century.

Sat, 09/25/2010 - 15:48 | 604533 RockyRacoon
RockyRacoon's picture

And... silver is more likely to become the currency as it has been in the past.  It's not called the poor man's gold for nothing.  That's why we hear so often from the gold-naysayers, "You can't buy a loaf of bread with a gold coin."  Idiots.

Sat, 09/25/2010 - 16:11 | 604574 Cognitive Dissonance
Cognitive Dissonance's picture

Personally I have gone half physical Silver, half physical Gold dollar wise. If Silver simply returns to it historical ratio of 50 to 1, Silver has a higher percentage rise coming than Gold. If not, I just don't see it getting worse, simply because it is the poor man's Gold. 

As more fiat dollars need to be exchanged for Gold, people will seek out a "cheaper" store of wealth. That's the only way they can think after a life time of indoctrination into thinking in terms of the dollar as "valuable". Since everything is measured in relation to dollars rather than to it's intrinsic "value" people will use the same thought process as they flee dollars. They just won't see the paradox, at least not immediately.

Sat, 09/25/2010 - 16:59 | 604637 RockyRacoon
RockyRacoon's picture

I love this quote:

Some time ago gold not only was used as money but also circulated as currency. It had always been money and people had no use for a separate currency to represent "gold money" so they stamped the gold itself and used it as circulating currency. From the start, one thing most thinkers can't quite grasp is that "money does not have to circulate"! The first "world money", gold money that is, could stay locked up and still represent value and wealth. People had but to agree on who owned it in exchange for goods and services. You have all read the articles about how paper receipts for "gold money" were later circulated and became paper currency receipts, then paper currency, then just currency.

Another has a concise and flowing way to lay out the facts.  Just one of many:

http://www.usagold.com/goldtrail/archives/another1.html



Sat, 09/25/2010 - 18:59 | 604739 nuinut
nuinut's picture

FOA said :

We were first alerted to the "gold is money" flaw years ago. When considering the many references to gold being money, in ancient texts, several things stood out. We began to suspect that those translations were somewhat slanted. I saw many areas, in old text, where gold was actually more in a context of; his money was in account of gold or; the money account was gold or; traded his money in gold. The more one searches the more one finds that in ancient times gold was simply one item that could account for your money values. To expand the reality of the thought; everything we trade is in account of associated money values; nothing we trade is money!


Sat, 09/25/2010 - 20:30 | 604815 puckles
puckles's picture

Well, of course, but let's also recognize how easy it was to inflate "gold" currency, and "silver" currency.  The latter should be within the historic range of many reading this blog, but to get a clear idea of gold currency inflation, one has to go back to the Roman Empire, and its inheritors.  They were masters of the art.  

 This tendency gave rise to the habit of biting a coin to determine its purity.  Do we really want to go back there?  There must be a better means of doing business based on gold.

Sat, 09/25/2010 - 23:58 | 605089 Ragnar D
Ragnar D's picture

95+% of my purchases go onto my credit card.  Since I use it as a debit card, ultimately it's a draw on my cash savings.  The internet and electronic financial infrastructuer would make a transition back to gold very painless.

As for "hard" transactions, I suppose you'll have people passing fake gold the same way they pass fake $20s and $100s, but I don't see it being a huge issue.  Paper money isn't inherently a problem either--I don't actually need to carry gold around if I know the difficult-to-counterfeit note in my wallet represents a legal claim on X ounces of gold (whether I redeem it today, next year, or never).

If my bank account were re-denominated in ounces (or grains) instead of dollars, the only change needed would be my price calibration (Quick!  What's a good price, in gold, for a can of tuna?)  Otherwise, I could write checks, carry notes, and swipe a debit/credit card linked to that same ounce-denominated account for goods priced in units of gold, and invest in companies whose stock was also priced in gold.

Sat, 09/25/2010 - 17:37 | 604671 Ricky Bobby
Ricky Bobby's picture

Silver will be used for spending Gold will be used for smuggling.

Sat, 09/25/2010 - 21:46 | 604905 A Nanny Moose
A Nanny Moose's picture

this works great....until you get a gold rush, or some kind of hording/manipulation.

Point is, the fixed rate was doomed to fail, since values of all commodities should be allowed to freely float, like a Baby Ruth in a swimming pool

Sun, 09/26/2010 - 00:47 | 605129 FEDbuster
FEDbuster's picture

I hope we never get to the point where physical gold is worthless (except for maybe dental work).  There is a great passage in the book "The Road" where the father holds a handful of Krugerrands for a few seconds, then lets them drop to the ground as he reaches for more canned food and ammunition to take with them.

Sat, 09/25/2010 - 22:20 | 604922 l1xx3r
l1xx3r's picture

It might occur at that ratio, but 2 things are wrong with that. 1) Gold and silver are valued differently by different people, so we still aren't sure what the free market ratio is. What if people keep valuing gold at a 60:1 ratio. 2) Currently, there is a higher ratio than 15 to 1 for silver, considering we have been mining gold like crazy, and been leaving most of the silver.

However, that being said, if more people value silver as much as most value gold, the ratio would become 1 for every 15 ounce of gold because there is a lot less silver for investment, and silver is consumed much more rapidly. If that ever happened (or started), silver mining would start to happen everywhere, destabilizing the value at a similar ratio to the recent historic level of 50 to 1.

My thoughts are that silver will stabalize around 35:1 and then slowly become 50:1 over the preceeding decade or so, and finally (30 years from now +/-) will work its way back to a 12:1 ratio.

I am not even sure why the ratio should be important at this time, it is comparing apples to oranges. There is some overlap as a monetary metal and I do hope that gap shrink however its not here yet.

Sat, 09/25/2010 - 12:49 | 604303 Buckaroo Banzai
Buckaroo Banzai's picture

Great to see FOFOA's writings featured here. Folks, if you like FOFOA, you should google Another and Friend of Another (FOA) and read their Gold Trail postings. Amazing stuff.

Sat, 09/25/2010 - 13:20 | 604332 billhilly
billhilly's picture

Yes, great reading and wonderful insight.  Go directly to his blog for further wisdom and great archives.  Also, consider contributing if you are able.

Sat, 09/25/2010 - 13:57 | 604388 DoChenRollingBearing
DoChenRollingBearing's picture

billhilly is completely correct on all points above.  Especially contributing to FOFOA's blog.

Sat, 09/25/2010 - 15:16 | 604501 Pining for the ...
Pining for the Fjords's picture

Absolutely.  FOFOA is one of only two blogs I have ever sent a donation to, and when physical goes above 5,000 I will send him one of my Eagles in appreciation. 

Support FOFOA.

Sat, 09/25/2010 - 18:47 | 604724 masterinchancery
masterinchancery's picture

Yes, excellent post FOA, I will check out your blog. Thanks Tyler.

Sat, 09/25/2010 - 12:52 | 604308 Hephasteus
Hephasteus's picture

But the system he talks about will require the con artist art of being able to sell an investment idea for other peoples gold instead of just going and getting it from their bank accounts through bond market and inflation. What if *gasp* people have become to sophisticated for widespread con artistry to work. It will be tough politicing in such an environment.

Sat, 09/25/2010 - 13:07 | 604322 Hulk
Hulk's picture

Iron core collapse, Bitchez!

Lots of folks around me "flooding" into physical Au and Ag, suddenly...

Sat, 09/25/2010 - 19:04 | 604742 nuinut
nuinut's picture

I like to think of it as more of a Consolidation myself, Hulk.

But it's all the same thing in the end...

Sat, 09/25/2010 - 20:08 | 604787 RockyRacoon
RockyRacoon's picture

The secular vanishing of the gold basis is a most ominous danger signal. It indicates that monetary gold is increasingly unavailable, and in case of a crisis it can no longer be relied upon to come to the rescue. Basis started out at 100 percent of the prevailing interest rate, but has been steadily eroding all the way to zero percent today. Permanent gold backwardation (negative gold basis) is staring us in the face. The gold basis is trying to tell us something. It heralds the greatest monetary crisis of all times. It warns about the possible collapse of the international monetary and payments system.

All kinds of ad hoc explanations have been offered for the debt crisis. But the real explanation is that under the threat of gold backwardation creditors are scrambling for liquidity. There will be no recovery unless provision is made for the orderly retirement of debt through a mechanism using gold as the ultimate extinguisher. The alternative is a Great Depression worse than that of the 1930's. To understand this we have only to contemplate the shock to the world if it was all of a sudden revealed that the debt of the U.S. government was in fact irredeemable. The Emperor is naked. As long as bonds carry a gold clause, or the bond market is supported by the trading of paper gold, bonds are deemed redeemable. But once permanent backwardation makes monetary gold unavailable, debt becomes irredeemable in the eyes of the bondholders. Paying U.S. bonds at maturity in F.R. notes does not establish redeemability. The latter is just evidence of debt secured by the former as collateral. This reveals that bonds are not really redeemable at all. At maturity, an interest-bearing bond is replaced by non-interest-bearing debt, that is, by an inferior instrument. All you do is shuffle various forms of irredeemable debt. When the world wakes up to this prestidigitation, the international monetary system will not be able to survive the shock-waves. The chaos that will engulf the world is appalling.

Read More -- September 25, 2010 – by  Dr. Antal Fekete

Sat, 09/25/2010 - 21:12 | 604853 DoChenRollingBearing
DoChenRollingBearing's picture

Dr. Antal Fekete, the other gold genius.

Actually, I ran into Fekete before I stumbled on to FOFOA.

Thanks for the post Rocky!

Sat, 09/25/2010 - 23:41 | 605070 nuinut
nuinut's picture

Note that Fekete's view has slowly moved to match FOFOA's.

He just seems to have trouble letting go of the idea that gold should circulate as currency.

Sat, 09/25/2010 - 23:59 | 605091 Buckaroo Banzai
Buckaroo Banzai's picture

Yes, Antal Fekete is another intellectual giant of our times. His work on the gold basis, and real bills, is vital to say the least.

Sun, 09/26/2010 - 00:43 | 605126 DaveyJones
DaveyJones's picture

Thanks for the link rocky

Sat, 09/25/2010 - 13:10 | 604326 deadparrot
deadparrot's picture

In other words, this time is different.

Sat, 09/25/2010 - 13:55 | 604377 CrockettAlmanac.com
CrockettAlmanac.com's picture

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

Sat, 09/25/2010 - 14:56 | 604473 tmosley
tmosley's picture

No, LAST time was different (1980).  Every time before that was the same, and it will be the same this time.

Sat, 09/25/2010 - 16:10 | 604569 nuinut
nuinut's picture

+1

Sun, 09/26/2010 - 19:06 | 606103 Temporalist
Temporalist's picture

+1971

Sat, 09/25/2010 - 13:12 | 604328 wafflehead
wafflehead's picture

Johnny Bravo is our shoeshine boy and we will tip him for a well done job with a dust sized particle of 10k gold.

Sat, 09/25/2010 - 13:54 | 604376 Hulk
Hulk's picture

In that case , we had better get a new shoe shine boy. We will never know when to sell...

Sat, 09/25/2010 - 13:55 | 604378 DoChenRollingBearing
DoChenRollingBearing's picture

Have not seen Bravo for awhile now.

JonNadler still has the cojones to show up though, he had a nice couple of replies yesterday.

Sat, 09/25/2010 - 13:59 | 604395 Hephasteus
Hephasteus's picture

That guy can party.

Sat, 09/25/2010 - 14:51 | 604472 wafflehead
wafflehead's picture

JB will be back soon when gold pulls back a bit

Sat, 09/25/2010 - 15:58 | 604554 Cognitive Dissonance
Cognitive Dissonance's picture

Here he is now. And he's loaded for bear. Or at least loaded.

Sat, 09/25/2010 - 13:12 | 604329 dark pools of soros
dark pools of soros's picture

people trust gold..  it doesn't get any simpler than that

Sat, 09/25/2010 - 20:56 | 604833 Bluntly Put
Bluntly Put's picture

And the alternative is to trust uncle Bennie and his dollar backed by the power of his printing press. Actually, one could say why isn't our currency backed by oil, or uranium or any other commodity that cannot be created by the whims of monetarist politicians? Obversely one may say gold's intrinsic value is that not only can it not be reproduced (debased) but it also has limited industrial use while still retaining value. Hard to beat 5,000 years of historical evolution.

Sat, 09/25/2010 - 13:22 | 604337 Blindweb
Blindweb's picture

Fofoa does excellent writing and it's hard to disagree with anything he says.  But he fails to incorporate peak oil into his price targets.  His targets will only be hit if it happens in the next five years or so.   

 

Peak oil is the destroyer of wealth/savings/asset values.  There just won't be that much excess wealth going forward.  Cities in the desert like Las Vegas and Phoenix are going to sell for pennies on the dollar.  The trucking fleet is going to become worthless.  Even liquid natural gas is just a stop gap. 

Sat, 09/25/2010 - 13:30 | 604345 Ignatius
Ignatius's picture

There are many 'places' FOFOA doesn't go... but, oh God, when he does -- eventually -- I'm confident it will be a delight.

Sat, 09/25/2010 - 13:55 | 604379 TomB
TomB's picture

IIRC, FOFOA is a peak oil skeptic.

Sat, 09/25/2010 - 16:06 | 604563 Buckaroo Banzai
Buckaroo Banzai's picture

FOFOA doesn't talk much about oil, because Another and FOA already talked about it, in a most definitive fashion.

http://www.usagold.com/goldtrail/archives/another1.html

Sat, 09/25/2010 - 16:11 | 604573 Buckaroo Banzai
Buckaroo Banzai's picture

FOFOA doesn't talk much about oil, because Another and FOA already talked about it, in a most definitive fashion.

http://www.usagold.com/goldtrail/archives/another1.html

Sat, 09/25/2010 - 13:55 | 604381 Hulk
Hulk's picture

Most folks can only contemplate one collapse at a time....

Sat, 09/25/2010 - 13:58 | 604390 CrockettAlmanac.com
CrockettAlmanac.com's picture

If peak oil becomes a reality nuclear will be rapidly ramped up to fill the gap.

Sat, 09/25/2010 - 15:06 | 604489 Hulk
Hulk's picture

Its the fifteen years in between that will be the killer...

Sat, 09/25/2010 - 15:56 | 604551 Cognitive Dissonance
Cognitive Dissonance's picture

Not if they fast track the plants and build them out of Popsicle sticks.

I was told by a nuclear engineer that the cherry Popsicle sticks are radiation proof and can be fashioned into excellant containment vessals. Who would have thought?

Sat, 09/25/2010 - 16:14 | 604580 Hulk
Hulk's picture

Yes, that is true, but I believe we hit peak Elmer's in 94 !

Sat, 09/25/2010 - 16:29 | 604603 Cognitive Dissonance
Cognitive Dissonance's picture

Then we're doomed, doomed I tell you.

Who would have thought a damn cow and some white glue could bring down the industrialized world as we know it. Go long tree sap maybe? :>)

Sat, 09/25/2010 - 19:58 | 604781 SWRichmond
SWRichmond's picture

hafnium tastes like cherries

Sun, 09/26/2010 - 00:51 | 605132 DaveyJones
DaveyJones's picture

Nuclear rapidly ramped up - the ultimate oxymoron

Sat, 09/25/2010 - 16:52 | 604626 Xedus129
Xedus129's picture

What about algae bio diesel.  I can't get algae STOP growing in my pool.  Wish I had a way to make it into fuel...

Sat, 09/25/2010 - 18:18 | 604701 Hulk
Hulk's picture

To replace the gasoline used in So Cal alone, you would need to plant an area 5 times the size of Kalifornia in switchgrass year round. obviously, this is an alcohol replacement, but similiar problem for algae. Completely non trivial, as we used to say in mathematics...

Sat, 09/25/2010 - 18:55 | 604731 Xedus129
Xedus129's picture

Yes, but think about how algae grows and surface area.... :)  Honeycombs!

Sun, 09/26/2010 - 19:24 | 606128 Temporalist
Temporalist's picture

I am with you on alternatives including oil from thermal deploymerization, hydrogen, electric (via multiple sources including solar, nuclear, geothermal, wind, wave), methane calthrate, nuclear, straight vegetable oil, etc.

I am under the belief that people will find a way, necessity is the mother of invention, and conservation is an often overlooked factor for when people can't afford oil/gas they will walk, bike, carpool, etc.

I read not long ago about someone that was fined for using veggie oil because he didn't pay the fuel tax. 

A Change Is Gonna Come -

http://www.youtube.com/watch?v=_FUXeg-elgM  (Otis Redding version)

http://www.youtube.com/watch?v=SQU4torUz-Q&feature=player_embedded#! (Sam Cooke Original)

Sat, 09/25/2010 - 21:19 | 604868 New_Meat
New_Meat's picture

Tokyo Electric's fast-track experience is 54 months from first concrete pour to on-the-bars. (KK6/KK7)

...preceded with ~8 years of engineering and long-lead-time items procurement (Reactor Vessel, etc.) Exacting regulatory environment.  All fulfilled.

There is your calibration on "rapidly" for further consideration.

obtw-we've kinda started on the ~8 initial years for kinda 4 units.

- Ned

Sun, 09/26/2010 - 10:19 | 605392 Hulk
Hulk's picture

That 54 months is impressive. To replace gasoline used in Kalifornia (which isn't necessary, just equating energy here) ,we would need to build 75, 1GW reactors.That figure doesn't include downtime for maintenance, line losses, other losses...

Sat, 09/25/2010 - 16:34 | 604606 DosZap
DosZap's picture

Blindweb,

"Peak oil is the destroyer of wealth/savings/asset values."

Yes it can be,BUT, lest we forget the US has enough crude in the ground, and offshore to be totally crude independent NOW. 

Couple that w/conversions to NG, and we need NO ONE, for our energy needs.Add windfarms offshore,CONUS,Solar where practical, we're home free for 200 more years.

Esp if the dead asses started building another 50-100 nuke plants.

Right now, IF we had any brains, the Gv't would CUT the energy (oil) companies loose on the KNOWN reserves, and build up a huge reserve stockpile.

But, then that's not The Plan is it.

Sat, 09/25/2010 - 16:53 | 604628 Xedus129
Xedus129's picture

I hope they drill for NG, sitting on 125 Acres of Marcellus shale baby

Sat, 09/25/2010 - 18:32 | 604712 Conrad Murray
Conrad Murray's picture

You should check out the movie Gasland if you haven't yet.

http://gaslandthemovie.com/

Sat, 09/25/2010 - 18:56 | 604732 Xedus129
Xedus129's picture

Seen it, disagree with it.

Sat, 09/25/2010 - 20:12 | 604794 tip e. canoe
tip e. canoe's picture

does not matter what you think mate,
'tis matters what the city of new york thinks.

better hurry and cash in...quick quick quick

Sat, 09/25/2010 - 22:12 | 604914 Xedus129
Xedus129's picture

They might not pass it this year or the next, but they will pass it eventually.

Sat, 09/25/2010 - 18:07 | 604688 Bananamerican
Bananamerican's picture

we had EIGHT years of a rambunctious oilman and his oily side-kick lying us into contractor lucrative resource wars, dragging our forces waaaay across the globe at Satanic cost, Shatting mightily on the Constitution at every turn yet trounced by "treehuggers" (!?!) and kept from drill baby drilling??

Ocamm's bitches...

we aint got none no' mo'

Reps, Junk if you like...

Dems too...

i piss on your partisan graves

Sat, 09/25/2010 - 21:23 | 604876 New_Meat
New_Meat's picture

lmao, but no specific solutions?

- Ned

Sun, 09/26/2010 - 06:49 | 605279 Snidley Whipsnae
Snidley Whipsnae's picture

"Yes it can be,BUT, lest we forget the US has enough crude in the ground, and offshore to be totally crude independent NOW."

Do you have a credible link to this claim? If so, you should have posted it.

What you are claiming is that the US could ramp up internal production by ~12 million barrels per day of crude. Extrodinary claims require extrodinary proof.

 

Sun, 09/26/2010 - 10:27 | 605399 Hulk
Hulk's picture

We should be converting our trucking fleet to NG right NOW. Cars too. And quit wasting NG on electrical generation. LED lighting should be fast tracked, not only saving massive amounts of energy, but also removing those POS cfl's from our homes...

Sun, 09/26/2010 - 11:13 | 605466 FEDbuster
FEDbuster's picture

You would think the "big" government people in control for the past two years could at least have done the nat. gas conversion of the trucking industry (and a lesser extent cars).  That would have been an infrastructure plan that would have had long term positive implications for the Country.  I guess that's why it didn't get done. 

Oil will always be cheap as long as the producers take fiat dollars for their product.  If they demand gold for payment, not so much.  I guess we are currently paying some of them in high tech military equipment.

Sun, 09/26/2010 - 02:01 | 605170 PhattyBuoy
PhattyBuoy's picture

"Peak oil is the destroyer of wealth/savings/asset values".

Why do you think Warren bought that toy train set ?

Wonder if he is betting on some supply dislocation in the near future ...

Sun, 09/26/2010 - 02:09 | 605175 AmericaRacket
AmericaRacket's picture

There are a lot of reasons to be skeptical of Peak Oil.  I've heard testimony of classified oil reserves in alaska, abiotic oil in russia, and all sorts of cover-ups regarding oil.  Russian scientists seem to be sold on the concept of abundant oil.  Greg Palast is reliable, and he has documeted evidence of oil men claiming peak oil to be a fraud.

Mike Ruppert is either totally wrong on this or sold out (or else he's right).

Sat, 09/25/2010 - 13:23 | 604339 DonS
DonS's picture

Awesome read. Thanks for posting ZH!

Sat, 09/25/2010 - 13:25 | 604341 Dismal Scientist
Dismal Scientist's picture

I like to think that this is Johnny Bravo, delivering his version of Spandau Ballet's classic, 'Gold'. Before you junk me into oblivion, the guy in the clip put it up himself; so clearly he's OK with having both Asperger's and Tourette's Syndrome...

http://www.youtube.com/watch?v=yfiZy9qnsHI

Disclosure: I own gold. But I don't have Tourette's.

Sun, 09/26/2010 - 00:03 | 605095 Al Gorerhythm
Al Gorerhythm's picture

Disclosure: neithe shitfuckcunt r do I.

Sat, 09/25/2010 - 13:29 | 604344 obewon
obewon's picture

This commentary was nothing short of "excellent."

Thanks, Tyler, for posting.

Sat, 09/25/2010 - 16:36 | 604608 DosZap
DosZap's picture

obe,

Yep, all of FOFOA's are.............

Another is great also.

Sat, 09/25/2010 - 13:38 | 604350 doolittlegeorge
doolittlegeorge's picture

All commodities are surging and of course "ain't no way company man you can pass on that price increase because the bad economy gonna git you."  The ULTIMATE conceit.  "Money for nothing and chics for free."  GLD continues to rise because the prices are being altered of the paper and not of merely the physical.  Was there even a mention of the miners here?  Of course not.  Last thing we want is people working for it and actually getting it, right?  You've gone "Daffy Duck" here and are screaming "mine! mine! mine! mine! mine!" and "I'm a happy little miser!"  Well I say "close sesame" because whatever you think of the government though you sure wanna act like it you sure "ain't it."  Nor of course could any individual possibly be.  There is no gold standard so "pass on those price increases or stick it to the goobermint."  That's for EVERYTHING.  What AREN'T they buying?

Sat, 09/25/2010 - 13:42 | 604352 Cognitive Dissonance
Cognitive Dissonance's picture

(Nash equilibrium analysis of financial markets is not some great new idea. It is standard economics. The only reason you are reading a Nash equilibrium analysis of the interaction between precious metals and official currency now on the Web, not 30 years ago in the New York Times, is that the Times gets its economics from real economists, not random bloggers, and the profession of economics today is deeply tied to the institutions that manage the global economy. Real economists do not, as a rule, spend time thinking up clever new reasons why the global financial system will inevitably collapse. They're too busy trying to prevent it from doing so.)

A wonderful explanation of the inherent conflict of interest mainstream economists have. Consider as well that this applies to the majority of financial planners, investment advisers, investment banks, brokers and sundry other Wall Street hanger-ons who manage money.

As much as the industry tries to convince everyone that there is no tried and true method of growing wealth, the industry is plagued by group think and herd mentality. Sure there are contraian advisors, of which I count myself. But for the most part, all this group think is directed against the retail investor, the derisively labeled dumb money.

Consider this for just one second. Would you do business with a grocery store that tells you to your face in it's advertisements that you were the "dumb" shopper? Don't say "No" because if it was the only store in town, you probably would. And this is the purpose of the SEC, FINRA etc. To make Wall Street, and by extension the banking cabal and it's maestro the Fed, the only store in town.

Sat, 09/25/2010 - 13:44 | 604360 Dismal Scientist
Dismal Scientist's picture

Store, or whore ? Pretty good business, if you're the only whore in town.

Sat, 09/25/2010 - 14:58 | 604477 Cognitive Dissonance
Cognitive Dissonance's picture

I guess it depends on if you're making deposits or withdrawals.

On second thought, maybe that's not a good analogy. Long vs short investor? Um, maybe I'd better just leave it alone and go get my shots. This dog don't hunt. :>)

Sat, 09/25/2010 - 15:57 | 604549 RockyRacoon
RockyRacoon's picture

I suspect that Robert Reich has a tin-foil hat hidden in his closet at home. I feel sorry for the guy because I'm sure he gets it.  He just can't come out and say it because his fellow "academics" would tar and feather him and hang him on the biggest oak tree on the campus of Berkley.  He will always be a day late in his blog and damned sorry that he didn't blow the whistle sooner.

Sat, 09/25/2010 - 16:05 | 604560 Cognitive Dissonance
Cognitive Dissonance's picture

There was a time when I thought that many economists didn't really believe what they were pushing. And I'm sure some don't, but are just playing the game. But many have been so thoroughly indoctrinated into their belief system and receive constant positive feedback/confirmation from their fellow economists that I have begun to think that many do believe what they say.

Sure they have some doubt. But from my studies of psychology, you'd be surprised how often we talk ourselves into believing what we wish to believe, especially when our personal and professional compensation, both monetary and ego, is substantial and consistent.

Sat, 09/25/2010 - 16:16 | 604584 Buckaroo Banzai
Buckaroo Banzai's picture

I had a professor in college who spend a single class session walking us through a simple yet iron-clad mathematical proof of why collectivist economics was the equivalent of saying that 0 = 1.

And yet, there was a whole army of Soviet economists who really believed in collectivist economics, and built an entire intellectual edifice around it, which lasted for 70 years.

 

Sat, 09/25/2010 - 16:37 | 604612 Hulk
Hulk's picture

0*1=2*0

divide both sides by 0

1 = 2

Crap!

Sat, 09/25/2010 - 16:59 | 604636 Xedus129
Xedus129's picture

You can't divide by zero..

Sat, 09/25/2010 - 17:05 | 604647 Hulk
Hulk's picture

Who saze? MS does it all the time!

Mon, 09/27/2010 - 04:54 | 606731 Hephasteus
Hephasteus's picture

But it requires a planet full of suckers in the equation to eat the stack overflow.

Sat, 09/25/2010 - 16:50 | 604621 Cognitive Dissonance
Cognitive Dissonance's picture

And yet, there was a whole army of Soviet economists who really believed in collectivist economics, and built an entire intellectual edifice around it, which lasted for 70 years.

It's not the various confirming proofs, numbers or logic that makes something "true" in the minds of many. It's the collective belief in it that makes it real, thus "true". Logic is often a roadblock to belief and thus, faced with financial ruin but "truth" or maintaining current conditions but living a lie, most people will choose the lie.

Daddy, tell me another lie so that I may believe it's the truth.

Denial is a valid and logical survival mechanism, if only for a short period of time. We must always remember that humans, when stressed, contract their world view and vision (aka perception) down to extremely short durations, sometimes to minute by minute. I can believe anything for a minute. Then I can believe anything for the next minute. Whatever it takes.

A perception, regardless of it's non logic, if supported by enough people, will make it a reality simply by the strength of the belief and faith in it. After all, the true strength of any fiat currency is based solely upon the faith and belief of the people using it.

Just as the old saying goes, that a destructive government can survive as long as it can shield it's population from the terrible effects of that government's decisions, so too a currency is strong only as long as a government can shield the effects of it's debasement and destruction from the perception of it's population.

A 1913 dollar is now "worth" only 5 cents. But the masters of the universe have still be able to manipulate all competing measures of value to the point where the dollar is still considered "strong". Now that's cognitive alchemy if ever I saw it.

Sun, 09/26/2010 - 07:12 | 605293 Snidley Whipsnae
Snidley Whipsnae's picture

"After all, the true strength of any fiat currency is based solely upon the faith and belief of the people using it."

Not entirely correct. The fiat currencies of the world are used because they are backed up by the monopoly of the governments of the world on the use of force...or, worded differently; if you refuse to use the gov issued fiat the penalty can be time in jail or worse.

The treasury dept, FBI, FDIC, FED, etc, exist to insure that the dollar is the ONLY currency in use in the US...We all know by now that the dollar as a store of value is a joke but we continue to be coerced by government force to use the dollar as a transactional currency. Given a choice most people would like a stable dollar to use as savings and therefore, a store of value. That choice is no longer available so people have turned to gold/silver as a store of value and the dollar has been revealed to be only a constantly devaluing transaction currency.

If the FED/treasury/government mismanages the dollar into worthlessness, which they are in the process of doing, then we will probably return to a more stable currency...hopefully gold/silver...or something that cannot be conjured magically from thin air.

Sat, 09/25/2010 - 16:40 | 604613 DosZap
DosZap's picture

They remind me of PAVLOV's dog training exercise.

Sat, 09/25/2010 - 22:18 | 604918 StychoKiller
StychoKiller's picture

Jeff Goldblum in "The Big Chill:"  "Dont' knock rationalization.  Have you tried going one day without at least one juicy rationalization?"

Sat, 09/25/2010 - 16:17 | 604588 Hulk
Hulk's picture

The homunculus is underwater in his Bezerkeley home, so one would think that some amount of reality has set in...

Sat, 09/25/2010 - 21:29 | 604884 New_Meat
New_Meat's picture

Rocky, no, I don't think that he can come out with anything that (in essence) contradicts e.g. Nobel Lauriat Paul Krugman (ex-Enron advisor) and the others.

"He just can't come out and say it because his fellow "academics" would tar and feather him and hang him on the biggest oak tree on the campus..."

well, it might be the shortest jacaranda tree, after all, he did make Clinton's "short list" with Donna.

just another cwm.

- Ned

 

Sat, 09/25/2010 - 13:40 | 604353 hugolp
hugolp's picture

Another FOFOA fan here.

Sat, 09/25/2010 - 13:45 | 604363 Bartanist
Bartanist's picture

Lost all interest in the article when it tranferred from the possibility of of why gold might have value to assuming it had value. How did the article go from gold being a collectable, with no intrinsic value to an assumed value.

Until that connection can be made, it is only a bubble ...imo.

Sat, 09/25/2010 - 13:59 | 604392 Buckaroo Banzai
Buckaroo Banzai's picture

FOFOA operates under the assumption that gold is the best store of value ever discovered by mankind. If you don't accept that assumption, then of course what he has to say will mean little to you.

10,000 years of history is on FOFOA's side, of course. What's on your side?

Sat, 09/25/2010 - 14:10 | 604415 CrockettAlmanac.com
CrockettAlmanac.com's picture

Lost all interest in the article when it tranferred from the possibility of of why gold might have value to assuming it had value.

People do value gold. That's a fact, not an assumption.

 

How did the article go from gold being a collectable, with no intrinsic value to an assumed value.

Gold's limited value as an industrial commodity is one important characteristic that makes it a long term store of wealth. This seems to be ironic but it's not. If you think the matter through it's quite sensible

Sat, 09/25/2010 - 15:59 | 604555 RockyRacoon
RockyRacoon's picture

Ah, the key missing in so much debate:  "...think the matter through..."

That loses so many who could make great contributions.

Sat, 09/25/2010 - 16:03 | 604559 RockyRacoon
RockyRacoon's picture

... assuming it had value.

Much like we "assume" you have a brain -- you demonstrate that you can articulate and type.  Now, with that FACT out of the way we can assess the "value" of your brain.  Therein lies the conundrum.

Sat, 09/25/2010 - 18:12 | 604695 harveywalbinger
harveywalbinger's picture

I agree with you about gold, but I don't see any reason you need to be a dickhead & talk down to this obviously confused person.  

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