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Of Gold & Geopolitics

Tyler Durden's picture




 

Submitted by Dan Popescu via GoldBroker.com,

“Gold is the sovereign of all sovereigns” Democritus

They say that gold is a geopolitical metal. Gold is real money with no counterparty risk and, furthermore, an excellent wealth preserver in time and space. Like fiat currencies (dollar, euro, yen, Yuan etc.), gold’s price is also influenced by political events, especially those having an international impact. Alan Greenspan, ex-chairman of the Federal Reserve, said that gold is money “in extremis”. This is why gold is part of most central banks’ reserves. It is the only reserve that is not debt and that cannot be devalued by inflation, contrary to fiat currencies.

Observe in chart #1 that central banks own 30,500 tonnes of gold, or 19% of above ground gold. However, this number is an underestimation, because several countries (e.g. China, Saudi Arabia) report only a portion or none at all of their gold holdings. In addition, if they do, they do not do it in a timely manner.

 

Global Gold Stock

 

I think that the official amount of gold held by some countries (through different institutions) is rather close to 40,000 tonnes. Even if this gold represents only 20% to 25% of the total gold stock, it can be quickly brought to market and in sufficient quantities to have an impact on the market price. The annual gold market is only 4,477 tonnes per year; it is thus easy for United States or the European Union to influence gold’s price, since they own respectively 8,333 and 10,779 tonnes of gold.

Currencies mirror the health of the countries issuing them. When a country manages its economy well and offers a good social and political environment, demand for its currency increases and, thus, it appreciates, whereas the opposite happens when the economy and politics of the country are poorly managed. The fiat currency is the image of the country and its value only depends on the trust people have in its economy. When the international monetary system is on the brink of collapse because of an exorbitant global debt, there is a flux taking place toward real assets (land, buildings, jewelry, gold, silver etc.). Gold is real money, contrary to the different countries’ currencies, which are fiat money and can be devalued by monetisation of the debt.

Since the beginning of history, gold has taken center stage in geopolitics. History tells us that the Roman Empire invaded Dacia (Romania today) at the start of the 2nd century B.C. to take control of the rich gold mines of the Carpathians. The Empire had depleted all of its gold mines and its expenses were growing rapidly. The roman economy was based on war and those wars were costing more and more gold while they would bring in less and less. By that time, the Romans had taken a liking for luxury items that they did not produce themselves, like fine silk from China, pearls from the Persian Gulf, perfumes from India, ivory from Africa, etc. Roman gold was being used for those purchases and a lot of it was needed. Later, in the 1500s, the quest for gold became the objective of the conquest of the Americas after the return of Christopher Columbus who had discovered the Aztec and Inca gold. During the Second World War, Hitler put together a team with the mission of getting hold of the gold and other treasures of the conquered nations. Nazi Germany used all of its available resources to win the war, and gold was an important weapon in Hitler’s economic arsenal (gold stolen from occupied countries’ central banks between 1939 and 1942). It is interesting to note that private ownership of gold was forbidden, by left or right leaders, totalitarian or democrats, from Lenin in Russia, Hitler in Germany, Mussolini in Italy, Mao in China to Roosevelt in the United States.

In 1944, at the Bretton Woods Conference, the United States took advantage of the great weakness of world after the Second War and imposed a monetary system based on the dollar, but backed by gold. Following a crisis opposing the United States and Europe, but mainly France, gold backing of the dollar was abandoned in 1971. Deficits and debts brought about by less productivity and some costly wars (Korea, Vietnam) started to weigh heavily on the dollar. The US dollar has become, since 1971, the international monetary standard, without any gold backing. However, gold has remained the “de facto” standard lurking in the shadows, should a major monetary crisis occur, watching for the first mistake to regain its center role. Many countries, like Canada, sold all their gold in the 90’s but, in general, the official holdings, as can be seen in chart #1, have barely diminished.

A new era started in the 90’s with the end of the Cold War and, thus, the beginning of a world disarmament. An era of peace and prosperity seemed to have started under the almost absolute dominance of the United States. During this optimistic period, gold fell from $850 to $250 an ounce. This period was short lived, because the September 11 terrorist attack in New York, the war in Afghanistan, the invasion of Iraq, the 2008 financial crisis and, recently, the annexation of Crimea by Russia have changed all that.

During the 2008 crisis - that almost succeeded in bringing down the current international monetary system - gold made a stunning comeback into the system. During the crisis, gold became the only accepted guarantee in order to get liquidity. What was significant was that after having been ignored for decades, gold was coming back into the international monetary system via settlements of the Bank for International Settlements (BIS). These transactions themselves confirm that gold was coming back into the system. They revealed the poor state of the financial system before the crisis and showed how gold has indirectly been mobilized to support the commercial banks. Gold’s old emergency usefulness has resurfaced, albeit behind closed doors at BIS in Basel, Switzerland.

Starting in 2008, we can also observe that western central banks stopped selling gold and that emerging countries’ central banks accelerated their gold buying. The extreme indebtedness of Western countries coupled with a rebirth of the emerging markets economies have destabilized even more an international monetary system based on an already much weakened US dollar.

 

Global Gold Reserves vs Global Gold Production

 

A confidence crisis has also reappeared between countries, especially between emerging countries and the United States. We are in a transition period in geopolitics and we are witnessing an economic shift and transfer of wealth from West to East. The new wealth owners are also asking for accrued political power internationally, in all the institutions where the European Union and the United States have a dominant position.

In order to protect the actual monetary system based on the dollar and that gives it exorbitant privileges, the United States manipulates the gold price, the only possible alternative if the dollar were to be replaced (or a SDR baked by gold). The United States is also trying to discourage countries and individuals to sell the dollar by way of negative public statements, but also by selling short on futures’ markets. Let us not forget that 40% to 60% of the US dollars circulate outside the United States. For the same reason, emerging countries are worried, and rightly so, that their reserves, mainly in dollars, will be confiscated by way of devaluation of the dollar. It is also possible that their gold reserves stored in the U.S. will be confiscated for so-called “force majeure” political reasons, in the interest of the “nation”.

Gold is money “in extremis”, and this is why it should not be stored out of the country. Only exception being an exceptional situation like a war, and only for a short time. I think that the only motivation countries had to store their gold in New York was greed through the possibility to speculate on gold at the risk of losing this “in extremis” reserve. Actually, this is what happened to Portugal; during the 2008 crisis and the Lehman Brothers’ default, the country lost its gold it had lent out. In times of crises or wars, it is very important not only to have legal ownership but also physical possession of the gold. Geopolitical alliances may change at any time and access to this “in extremis” money could be restrained or even refused.

In the current geopolitical framework that Ian Bremmer has so well called G0 (no country dominates; each one has advantage but also disadvantages), an international power struggle is occurring between the United States, the European Union, Russia and China. In this new Cold War, albeit in a G0 environment rather than in a G2 (United States and Soviet Union), where the European Union is not really allied with the United States and where China is not really allied with Russia, uncertainty prevails. In addition, other actors may influence this new Cold War that just got started since the annexation of Crimea by Russia. In a previous article on the gold wars, I mentioned the role of accelerator, agitator or troublemaker that third parties like Russia or Saudi Arabia could play. That is what happened with Russia, in Crimea, one month later. There is a war on the price of gold led by western countries, but there is also a war for gold ownership between all the countries; eastern countries being the ones that wish to exchange their dollar reserves for gold and as fast as possible.

In this new Cold War, which also includes a currency war, the role of gold has become central in the international political strategies of all countries involved. During this period of major risks and uncertainty, and until the return of a new geopolitical, economic and monetary order, gold will shine. Gold is money “in extremis” and is the only real money without any counterparty risk. This is why gold is considered, and rightly so, a geopolitical metal.

 

Official Gold Reserves in Tonnes – Developed Countries vs Emerging Countries

 

Official Gold Reserves as a Percentage of Total Foreign Currency Reserves

 

Official Gold Reserves as a Percentage of GDP – Developed Countries vs Emerging Countries

 

Public Debt as a Percentage of GDP – Developed Countries vs Emerging Countries

 

 

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Sun, 05/18/2014 - 20:32 | 4772312 dow jones 20000
dow jones 20000's picture

so essentially: keep stacking?

Sun, 05/18/2014 - 20:55 | 4772368 nasdaq99
nasdaq99's picture

i suppose "Libanon" is Lebanon?

Sun, 05/18/2014 - 21:02 | 4772380 lordylord
lordylord's picture

How much longer will the people allow their wealth to be stolen?  At some point it will no longer be tolerated. 

Sun, 05/18/2014 - 21:04 | 4772399 NoDebt
NoDebt's picture

"Even if this gold represents only 20% to 25% of the total gold stock, it can be quickly brought to market and in sufficient quantities to have an impact on the market price."

Sovereigns don't trade their gold often.  When they do, they don't trade it "on the market".  They'd blow the daily spot price to smithereens.  They trade direct.  They may reference the spot market price (or not), but they don't trade it on the market.  Certainly nothing in any quantity.

Sun, 05/18/2014 - 23:34 | 4772707 strannick
strannick's picture

Au contraire. When western Sovereign Govts sell gold, especially lackey nations like Canada and Portugal, they trade it off balance sheet, seripitiously, leased, traded after market, via proxies thru the B.I.S., trade it during illiquid hours, at market, in conjuction with the Federal Reserve and BOE, to smash the price.

"Gold is my enemy"

-Paul Volker

Sun, 05/18/2014 - 21:35 | 4772476 Bro of the Sorr...
Bro of the Sorrowful Figure's picture

when people outside of the zerohedge community actually realize their wealth is being stoloen. mentioning gold, fiat currency, or the fed to the sheeple is like bringing up astrophysics or, you know, basic math.

Mon, 05/19/2014 - 04:46 | 4772871 Treason Season
Treason Season's picture

Try this. You'e drinking beer and you tell your mate you will write an i.o.u to him for $10 to buy the first round of drinks. So he gives you the tenner and the next round you tell him to pay for it with your  i.o.u. When your friend says the bartender won't take it, explain to him that because the bartender doesn't trust me, the counterparty to the note, it's worthless. Just like all monetary paper in the world, bank notes, gov't and private bonds etc.. Only pm's are counterpartyless, no trust needed! Maybe it's easier to see with beer goggles.

Sun, 05/18/2014 - 22:59 | 4772649 Pairadimes
Pairadimes's picture

"It is the only reserve that is not debt and that cannot be devalued by inflation, contrary to fiat currencies."

Alas, the current crop of clever banksters have figured out how to devalue gold by inflation. They have done it by introducing 'artificial' gold in various ways, inflating the supply of gold by adding ersatz gold in these forms, and convincing investors that the artificial form is as good as the real thing.

The consequence of this is that gold is prevented from doing the crucial work of exposing the theft of value in the currency. Want the game to stop? Insist on physical possession in every instance, and expose gold derivatives for what they are - an instrument of debt and an empty promise.

Sun, 05/18/2014 - 21:00 | 4772384 AssFire
AssFire's picture

KCSO

stack on.

Sun, 05/18/2014 - 21:38 | 4772483 SAT 800
SAT 800's picture

Christopher Columbus discovered the Aztec Gold !!! This person's educational status is very, very, low. the article is full of howlers like this.

Mon, 05/19/2014 - 08:28 | 4773080 Jam Akin
Jam Akin's picture

Libanon is a 12 step program for recovering feminists

Sun, 05/18/2014 - 20:40 | 4772334 Goldilocks
Goldilocks's picture

"Gold is money “in extremis” and is the only real money without any counterparty risk."

--gold is NOT the only real money without any counterparty risk!

Sun, 05/18/2014 - 21:02 | 4772392 Al Huxley
Al Huxley's picture

Can you name the other ones?

Sun, 05/18/2014 - 21:06 | 4772407 NoDebt
NoDebt's picture

Beer, Cigarettes, Women, Cattle and Oxycontin.  How'd I do?

Sun, 05/18/2014 - 21:07 | 4772412 FredFlintstone
FredFlintstone's picture

Tide, 2 liter bottles of soda.

Sun, 05/18/2014 - 21:17 | 4772439 Chupacabra-322
Chupacabra-322's picture

Ammo.

Sun, 05/18/2014 - 21:10 | 4772420 Al Huxley
Al Huxley's picture

LOL - Damn, I'm trying to recall the properties that define something as suitable for money but I'm drawing a complete blank.  Well done.

Sun, 05/18/2014 - 21:17 | 4772437 fonzannoon
fonzannoon's picture

bullets and big titties too,

Sun, 05/18/2014 - 21:45 | 4772495 Al Huxley
Al Huxley's picture

Big titties as distinct from 'women'?

Sun, 05/18/2014 - 22:07 | 4772509 fonzannoon
fonzannoon's picture

yes absolutely distinct. Women are nothing but counterparty risk. Big titties on their own have none. It is the easiest lesson in the world and yet the most difficult one to adhere to.

Al you see this?

http://www.bloomberg.com/news/2014-05-18/gold-appetite-shrinks-in-thaila...

Sun, 05/18/2014 - 23:01 | 4772651 Al Huxley
Al Huxley's picture

No, hadn't seen that - so gold buying community finally comes to their senses and switches into equities. 

They'll be glad, I can't see a repeat of 1997/98 ever happening, we've come so far from those days.

Mon, 05/19/2014 - 05:04 | 4772880 stacking12321
stacking12321's picture

fonz, i'm calling BS on the article.

"Dick Poon, the general manager at Heraeus Metals Hong Kong Ltd., said in a May 8 interview."

dick poon? really?

from urbandictionary:

"dick-poon:

The penis/vagina combo pack of a hermaphrodite."
Mon, 05/19/2014 - 06:36 | 4772952 lakecity55
lakecity55's picture

Don't worry, AL, when things get primeval, it's pretty easy to figure out.

Sun, 05/18/2014 - 21:14 | 4772426 TeamDepends
TeamDepends's picture

Sweet, sweet, smoky bacon.

Mon, 05/19/2014 - 08:10 | 4773047 ATM
ATM's picture

Not very well. Each of those "monies" you listed are not very durable and all can be consumed. They can function as currency but money they are not.

Sun, 05/18/2014 - 21:10 | 4772418 Urban Roman
Urban Roman's picture

That's true, there's also Bitcoin!

But somehow, "Bitcoinilocks" does not roll off the tongue.

Hmmm ... "Cowrieshellilocks"? "Stonewheelilocks"? ...

 

Sun, 05/18/2014 - 20:40 | 4772336 Gunga
Gunga's picture

The track record of the people that manage the value of the US dollar is not good.

Sun, 05/18/2014 - 21:03 | 4772396 Al Huxley
Al Huxley's picture

I think that probably depends on your perspective. They're probably quite happy with their track record, given the wealth transfer they've managed to accomplish.

Mon, 05/19/2014 - 05:50 | 4772921 ParkAveFlasher
ParkAveFlasher's picture

You keep your own track record, you love your results, you tell all the world what a speedy devil you are.  Look, says right here...really fast!

Sun, 05/18/2014 - 21:04 | 4772405 lordylord
lordylord's picture

"The track record of the people that manage the value of the US dollar is not good."

They are doing a wonderful job stealing wealth and they have a great track record of doing it.

Sun, 05/18/2014 - 22:07 | 4772545 Kirk2NCC1701
Kirk2NCC1701's picture

Let me be more specific:  The track record of the 'people' who control the money/currency supply of countries since the 1800s has not been good at all.  No matter who was king, PM or President.

Mon, 05/19/2014 - 08:13 | 4773055 ATM
ATM's picture

I would say they have a perfect track record. 100% clusterfuck.

Sun, 05/18/2014 - 20:42 | 4772340 AUD
AUD's picture

What do you mean 'also possible' that their gold reserves stored in the U.S. will be confiscated for so-called “force majeure” political reasons?

It's reality, in 1971!

Sun, 05/18/2014 - 21:47 | 4772498 SAT 800
SAT 800's picture

That;s exactly right. France sent their fast Atlantic Steamer to New York harbour loaded up with bales of dollar bills to exchange for Gold; which was now, legally, theirs. They were forced to return to France with the paper. And Nixon said he wasn't a crook !! He sure looked like a crook to De Gaulle and the Germans; but then as it says in the Bible, "Justice depends on whose Ox is getting gored".

Sun, 05/18/2014 - 20:44 | 4772346 TeamDepends
TeamDepends's picture

"There is a war on the price of gold led by western countries, but there is also a war for gold ownership between all the countries; eastern countries being the ones that wish to exchange their dollar reserves for gold and as fast as possible."

In the end, when they attached a rat cage to my face, I learned to love Big Brother.

Sun, 05/18/2014 - 23:06 | 4772664 kchrisc
kchrisc's picture

The funny thing about the "war on the price of gold" is that for those in the east it is actually a "blue-light special."

 

Mon, 05/19/2014 - 07:42 | 4773008 Urban Redneck
Urban Redneck's picture

The soldiers have all just re-upped to continue the war. New Central Bank Gold Agreement in place.

http://www.snb.ch/en/mmr/reference/pre_20140519_1/source/pre_20140519_1....

Sun, 05/18/2014 - 20:47 | 4772355 Supafly
Supafly's picture

Uh oh.  Since we're now the "in extremis", where will it go?  Wait, where did it go?

Sun, 05/18/2014 - 20:54 | 4772367 Joebloinvestor
Joebloinvestor's picture

Anything that can be manipulated will be.

Mon, 05/19/2014 - 06:17 | 4772940 CHX
CHX's picture

Anything that can be manipulated IS.

Fixed.

Sun, 05/18/2014 - 20:56 | 4772374 NoWayJose
NoWayJose's picture

You will need gold for the 'Great Currency Re-Set and Economic Recovery' that will follow the Great Economic Collapse of 201x. Anything you had in the banks, in stocks, in fiat on hand, or in bonds will be worthless.

Sun, 05/18/2014 - 21:00 | 4772385 samcontrol
samcontrol's picture

and they will close the ATMs and everybody turns into zombies ?
NIET, they will print for decades more.
When the US gets at 30% a year inflation we can talk zombies.

Sun, 05/18/2014 - 20:57 | 4772375 indygo55
indygo55's picture

Those charts are sourced from the IMF. Yeah, right! Like China still has 1054 tons of gold.  What a bunch of bull shit.

You can't believe anything the IMF or the BIS for that matter prints. That goes for the FED and the US Goverment as well. 

 

Sun, 05/18/2014 - 20:57 | 4772376 Goldilocks
Goldilocks's picture

World's Fattest Cats (Top 5!!!)
http://www.youtube.com/watch?v=yAIGLAgEa84 (1:20)

Sun, 05/18/2014 - 20:58 | 4772378 samcontrol
samcontrol's picture

Can't remember who mentioned the AGQ option on here, but I am going FULL RETARD on silver by Friday.. will choose some 2016 call.
Do or die kind of shit..
This casino investment shit has bored me to death..
my idea ...turn200k into a million by January 2016.

you guys go ahead and stash, I can't.

Sun, 05/18/2014 - 21:12 | 4772424 Al Huxley
Al Huxley's picture

Well, FULL RETARD is definitely the right description for going all-in on paper silver options.  Why don't you just mail your money directly to the TBTF bullion banks?

Sun, 05/18/2014 - 21:30 | 4772460 SAT 800
SAT 800's picture

And what are you going to do when you realize your million in 1/2016 has the purchasing power of your present $200k ?

Sun, 05/18/2014 - 22:22 | 4772569 u8mapwho
u8mapwho's picture

Still better than holding the $200k in cash.

Sun, 05/18/2014 - 22:00 | 4772533 Proofreder
Proofreder's picture

HL Jan '16 3.00 call - 80 cents

Where will Silver be in late 2015 ???

Gentlemen, place your bets - perhaps a 5-bagger ???   Only time will tell.

Sun, 05/18/2014 - 22:29 | 4772590 quasimodo
quasimodo's picture

5 bagger? I have to hand it to ya, you are quite the optimist.

Sun, 05/18/2014 - 21:00 | 4772383 83_vf_1100_c
83_vf_1100_c's picture

  So as a stacker, Lebanon is looking like a good place to live?

Sun, 05/18/2014 - 21:01 | 4772389 samcontrol
samcontrol's picture

lol

Sun, 05/18/2014 - 21:04 | 4772398 samcontrol
samcontrol's picture

lol

Sun, 05/18/2014 - 21:03 | 4772395 Hulk
Hulk's picture

and its up 30 cents, so we got that going for us !!!

Sun, 05/18/2014 - 21:04 | 4772397 pocatello
pocatello's picture

Gold, beetches.

Keep on stacking.

Sun, 05/18/2014 - 21:18 | 4772421 OC Sure
OC Sure's picture

 

 

 

Gold is not money but it is one of the best things that we chose to represent money.

Per Aristotle, money is any unit of measure we use as the means of equalizing disproportionate work:

For example, observe a transaction between a builder and a shoemaker. The builder needs shoes and the shoemaker needs a house but the builder wouldn't trade a house for a pair of shoes nor would he accept 1,000 pairs of shoes for a house. So money was conceived as a measure for the exchange among producers whose labor is simpler versus those whose labor is more complex. This conception is then objectified by an agreed upon perceptual unit; a real thing that can represent the conception of money. Say that one monetary unit will equal 1 pair of shoes. Now the builder can give the shoemaker a unit for a pair of shoes. The shoemaker can sell a thousand pairs of shoes and then give the builder 1,000 units for a house. So money actually represents an exchange between producers who trade their work for the work of another.

 

Gold is one of the best choices to represent money primarily because it is not easy to counterfeit. The counterfeit is not the debased metal but instead the fact that the counterfeiter is attempting to pass off that he has worked to produce a product to trade when he has performed no productive work at all.

 

 

Sun, 05/18/2014 - 21:19 | 4772444 FredFlintstone
FredFlintstone's picture

That is one of the best illustrations I have read and I have read many.

Sun, 05/18/2014 - 21:48 | 4772467 OC Sure
OC Sure's picture

Thank you, FredFlintstone (that is my paraphrase of Aristotle's description in his Nicomachean Ethics).

It seems very important to understand exactly what money is since it is not a far leap to make the connection from how I have explained it to what the central banking systems do by creating paper and digital blips. That process is not making money because what they are passing off does not represent actual productive work. They are trading their lack of work for anyone else's work. When viewed this way it is simple to see what counterfeit is; they are exchanging nothing for something. This is theft.

Remove the unit of measure and observe the counterfeiter in the barter exchange per the example above. A third party engages the other two but this party does no work and offers no product but nevertheless demands that he be given their product. If such a party were to attempt to barter his nothing for your something you would undoubtedly walk away. However, when money is introduced, he gives to you what appears to be the same agreed upon unit that measures the exchange of work. Your presumption of course is that that party must have earned those units by working too. However, you have been duped. Instead of working to earn units of money, the corrupted party has debased the unit.

So, it is important to see that just as money represents work, so too does counterfeit represent no work at all.

Mon, 05/19/2014 - 00:13 | 4772762 TheFutureReset
TheFutureReset's picture

I think you rely too much on a labor theory of value. That can be a slippery road, because it was started from Smith and carried to fullest conclusion in Marx.

The shoemakers's second, third, etc. pair of shoes might not be worth the same as the first to different customers at different times, therefore the labor exchange you are talking about is not a good measure of value. Gold is money not because it has labor involved in its mining, it has value because people want it. It's subjective. A glaring example is also interest rates, why would they fluctuate if prices were dependent on labor inputs? 

People want the dollar so it has subjective value. However, as more people around the world start wanting it less it will lose that subjective value with no intrinsic bottom. Gold has intrinsic value, that has stood the test of time, which is why it is the best form of money, not any measure of labor that was put in to mine it. 

Mon, 05/19/2014 - 06:40 | 4772947 OC Sure
OC Sure's picture

 

 

I agree. The money represents the work but the price is set by the demand.

However, it is not a theory that money was introduced into commerce as the means of measuring and thus equalizing disproportionate work so that people can easily trade there products with others.

That is why humans invented money.

Mon, 05/19/2014 - 10:52 | 4773622 InvalidID
InvalidID's picture

NOT TO BE AN ASSHOLE BUT GOLDDOENS'T HAVE INTRINSIC VALUE EITHER. PEOPLE HAVE ALL AGREED TO USE IT AS A STORE OF VALUE AND NOTHING MORE.

Mon, 05/19/2014 - 11:05 | 4773665 OC Sure
OC Sure's picture

That's right. The concept of value only arises when humans become involved and begin exercising their choice and discriminating whether they prefer one thing rather than another.

However there are several reasons why we choose to store our value in precious metals instead of chicken feathers.

If it is not more then a store of value, what for then are people storing the value?

At some point, it is expected to be exchanged for something else.

Mon, 05/19/2014 - 13:26 | 4774316 Freegold
Freegold's picture

"To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item."

FOA

Sun, 05/18/2014 - 21:34 | 4772470 SAT 800
SAT 800's picture

This is called the unit of transaction function of money. It is one half of the definitoin of a fully functional money. the other half of the definition is a "store of value"; so that the exchanges can be offset in time. The FRN works perfectly has a unit of exchange; but it fails completely as a store of value; as it "evaporates". This is why Gold and Silver are real money; t hey don't "evaporate"; (devalue).

Sun, 05/18/2014 - 21:54 | 4772480 OC Sure
OC Sure's picture

That's right. The unit needs to maintain its measure steadily so that it can be held and used in the future with the same expected exchange that it would presently.

I disagree that the FRN works as a unit of exchange. Counterfeit abounds because the FRN is counterfeit and thus corruption and theft abounds. It could work if the status quo were honest and the FRN actually represented productive work from its disseminators. However, that is why liberty prefers gold as money instead; it tends to stifle tyranny.

 

Sun, 05/18/2014 - 22:11 | 4772549 SAT 800
SAT 800's picture

The Nicomachaen Ethics is a wonderful read. I salute you for your studying. Aristotle was the last sane Philosopher, per se, in the Western World. The Catholic Scholastics, and then the post Renaisance Philosophers were all extremists and idealogues of one kind or another; basically they were all nuts.

Sun, 05/18/2014 - 23:13 | 4772674 Al Huxley
Al Huxley's picture

Not all of them - Hume, Hobbes, Locke, Bentham, William James more recently (and a few others that aren't popping immediately to mind) had some pragmatic insights into human nature, the nature and limits of knowledge, etc.  If you're talking about the big system builders, yeah, maybe a little nuts, but I think you need to consider the context and time at which they were writing.

Mon, 05/19/2014 - 00:21 | 4772770 TheFutureReset
TheFutureReset's picture

Money will also move from place to place depending on the differences in countries. It will have a higher price in some places and a lower price in others (not by much, it at the level of the streets this is still very much true). 

If the value is dependent on productive labor why would this be so? 

Mon, 05/19/2014 - 06:40 | 4772944 OC Sure
OC Sure's picture

 

 

The money represents the work. The value, the price, is set as you say subjectively or per the demand.

Part of my main point is that what you are calling "money"  moving from place to place is not money; it is counterfeit. Its fraudulent and represents no work done to create a product as the means to obtain products that others have produced. That counterfeit is the method of the thief. The thief is exchangeing nothing for something and this is how it sucks the blood from its host. Its the cause of declining purchasing power and the widening disparity between the middle classes and the upper tiers.

So the problem is not because of the labor theory of value, right? The problem comes from the lack of labor; or those who produce not a thing but usurp their livelihoods from those who produce anything.

Modern economics is hocus-pocus in favor of the magician.

Mon, 05/19/2014 - 09:10 | 4773220 TheFutureReset
TheFutureReset's picture

Separating the definition of money from any dependency on value is a new one to me. Don't get me wrong, the dollar is fiat and not money, but work involved in making true money has nothing to do with its value. 

There has arguably been a lot of work conceiving of, instituting and maintaining the fraudulent system (I know, I'm an economist that joined the military years ago, which was a mistake). That is "work" is it not.? Bottom line work involved doesn't need to be considered. Only want and individuals' subjective values need be. Gold will win in the end. 

Mon, 05/19/2014 - 10:06 | 4773327 OC Sure
OC Sure's picture

There is no separation. The money and value are integrated; it is just that the former causes the necessity of the latter.

Let us define what we mean by work. That is to say work as the means to a productive end or work as the means to a system of fraud; the former is honest, the latter is not.

Gold will only win in the end precisely because it is the best form of money that keeps people honest; under a gold standard honest work is rewarded and fraud is stifled.

Bottom line is that work involved is the most important factor to consider because it answers the question as to whether or not it begets money which was acquired honestly or that it begets counterfeit which was acquired by fraud.

Mon, 05/19/2014 - 12:51 | 4774174 TheFutureReset
TheFutureReset's picture

Gold can  be acquired fraulently. Money doesn't have morals. People have morals, and people's values are where your work component belongs. Not in a formulation of a theory of money. Gold enables people's morals to be applied to commerce. 

Mon, 05/19/2014 - 15:27 | 4774754 OC Sure
OC Sure's picture

TheFutureReset, I'm not sure where I lost you but maybe someone else reading this thread can point it out.

The key points are from the original post regarding the transaction between a builder and a shoemaker. This is not the formulation of a theory of money. It is exactly why money was invented. It is the concept of money put into action.

As for morality, the choices persons make and act upon, it is good to do productive work and bad to impersonate that you have done productive work when in fact you have not.  

Sun, 05/18/2014 - 21:35 | 4772474 Docnyc
Docnyc's picture

I don't know about you kids but I hold gold because of "tradition".

Sun, 05/18/2014 - 21:41 | 4772488 SAT 800
SAT 800's picture

Any reason for a right decision is a right reason; and any reason for a wrong decision is a wrong reason. Tradition will do just fine.

Sun, 05/18/2014 - 21:41 | 4772490 earleflorida
earleflorida's picture

FWIW Dept:

The price of gold fell ~75% in China after V-J day. Physical gold is the 'only' hedge against 'wartime' inflation...!

Now... the question that should be asked? ,how is wartime inflation micromanaged by QEinfinity when WWIII has already been compartmentalized?

 

Sun, 05/18/2014 - 21:50 | 4772506 NickVegas
NickVegas's picture

Of course, all the numbers are make believe, because no one ever gets to audit these "reserves". You would think they would be happy to show the investing public their reserves to keep "faith" in their ability to manage these reserves, and promote faith in the system. Tungsten, baby, the greatest heist no one has figured out yet. Well, the empty vaults too. Lies, damn lies, and gold reserves.

Mon, 05/19/2014 - 04:00 | 4772853 Fred C Dobbs
Fred C Dobbs's picture

"Lies, damn lies, and gold reserves."

I think you may possibly see your phrase repeated in the future.  Truman almost had it right. 

Sun, 05/18/2014 - 22:06 | 4772543 F22
F22's picture

Gold is not debt.....unless you've leased the same gold out to 10 different people....at that point though I suppose that posession is all that matters eh?

Mon, 05/19/2014 - 07:57 | 4773017 Lionhearted
Lionhearted's picture

Possession is nine-tenths of the law. What do you posses?

Sun, 05/18/2014 - 22:31 | 4772591 RaceToTheBottom
RaceToTheBottom's picture

i think that the article should not have jumped over so quickly what France did in 71. France was getting gold in place of dollars, because of the artificially low price of gold in dollars. The US recognized that this was unsustainable.

There are huge parallels to now. Look at China and to a lessor degree Russia, they are both playing the role of France historically....

This is a watershed moment....

Sun, 05/18/2014 - 23:07 | 4772663 Al Huxley
Al Huxley's picture

Indeed, although in the 60s France was openly converting USDs to gold and Nixon closed the window to stop it, whereas now China is accumulating somewhat unofficially (official reserves still under 1500 tons!?!) but the western banking community is actually facilitating the transfer through a combination of price manipulation and propaganda.  What a difference 40 years makes.

Mon, 05/19/2014 - 00:25 | 4772777 TheFutureReset
TheFutureReset's picture

The seven years Germany has to wait for its 300 tonnes is similar to the French ship being turned away, no? 

Sun, 05/18/2014 - 22:51 | 4772637 besnook
besnook's picture

apparently the market thinks gold and silver have a minimal risk price as both are trading right at production costs currently. if it is true that gold is the maximus super money therefore is the most current vix indicator then the price is saying the market thinks everything is hunky dory, that the crisis is under control. on the tinfoil side, however, if i controlled the gold(and silver) market and i knew that the end game is a new improved currency then i would want as much gold as possible for protection money. sovereign and private demand says there is a lot of demand for gold. it just makes sense then that maximus super market be controlled to both make it profitable to mine gold while supplying the increased demand(unless it is german gold in a new york vault). when the perceived amount of an adequate reserve of gold is met(by whom?) then all hell will break loose and you will be glad you own some gold and silver. in the meantime, stack because there is very little incentive for the price to go much lower or much higher than here until another catalyst maximus.

 

Sun, 05/18/2014 - 23:22 | 4772697 Lionhearted
Lionhearted's picture

I see PM's as a store of value in time as well as security. Currently is 1295 peices of green printed paper buy an ounce of Gold. In the future an ounce may cost 12950 peices of green printed paper. Unfortunately today's 1295 peices of green paper will buy the same amount of food today as the 12950 peices of green paper will buy in the future.

The only thing I know for sure is that when 1295000000000000 peices of green paper are needed to buy a loaf of bread. I will be more likely to be able to buy that loaf of bread with a peice of PM than you will be able to buy it regardless of how many peices of green paper you have. That is the security aspect. Of course I also own firearms. :)

Mon, 05/19/2014 - 06:07 | 4772934 Guru.
Guru.'s picture

@ http://www.zerohedge.com/comment/reply/488624/4772697#comment-4772697

There is distinct possibility that you could get more than a loaf of bread, if don't convert to currency before buying.

Green pieces is fixed by .gov. But the number of loaf of bread for 1oz will be fixed by market.

 Isn't it?

Mon, 05/19/2014 - 06:57 | 4772963 Lionhearted
Lionhearted's picture

I lived in Argentina during one of their hyper inflation episodes. The retailers would not even stock their shelves with stock because the value of their goods were far more consistent than printed paper. Everyone hoards their hard goods. The goods became the money. The paper currency was a joke but no one was laughing. They price of your bacon, stock, gasoline, beef is not going up the value of your $ is going DOWN.

Sun, 05/18/2014 - 23:15 | 4772676 jack stephan
jack stephan's picture

http://www.youtube.com/watch?v=PTwCBl0MpBE&sns=em

The people I have met aver the last two years, are too ready
This can go on for years, they anticipate blood tomorrow, this can go for years, no one gets it

Sun, 05/18/2014 - 23:25 | 4772701 Lionhearted
Lionhearted's picture

They have been printing FIAT currency since the Roman Empire. How well did that end? They can't print gold or silver.

Mon, 05/19/2014 - 00:30 | 4772782 TheFutureReset
TheFutureReset's picture

With the silver fix closing, that should put some pressure on the gold fix. I can't wait for China to say they've had a huge failure to deliver. That could happen shortly after the gas deal with Russia coming out next week maybe. 

Mon, 05/19/2014 - 04:27 | 4772866 vyeung
vyeung's picture

numbers are incorrect. Russia/China together have 40K+ tonnes.

US has no gold left, its all been rehypoéd.

They have loads of US treasuries though. They can prove that, but can't prove the gold still exists in Fort Knox for a poultry 8K tonnes which in the new normal is small fry. But then again they just plan to invade someone and then take the yellow stuff. How about they show us the 30+ tonnes they stole from Kiev in one night.

Mon, 05/19/2014 - 05:29 | 4772899 The wheels on t...
The wheels on the bus are going to fall off's picture

Gold is insurance and the foundation of wealth, when i see Gold move its because i know the dollar has weakened.

This manipulation will not go on for much longer, because the dollar cannot sustain its strength for too much longer. The economies GDP is stalling already, the tools that Yellin is talking about is CTRL+P which will further devalue the dollar, notwithstanding this the bilateral trading between countries in energy are bypassing the dollar, notwithstanding this the FED are already buying more bonds than the official numbers through Belgium. This whole thing is a playground joke, QE does not work, the FED have it the wrong way round, they will not admit it, and they will continue to print when the SHTF.

It feels to me, that we are nearer a collapse than we are to a collapse 'further down the line'

I bet on 2016, my mate bets on 2014, so i guess it will be more likely 2015.

Mon, 05/19/2014 - 06:07 | 4772931 mogul rider
mogul rider's picture

Gold is real money with no counterparty risk and, furthermore, an excellent wealth preserver in time and space.

 

Umm 1900 to 1300 is one fucking way to show what a piece of bullshit yoru statement is.

I am not a gold hater, I own lots of it. I bought to protect me from concentration camps guards and government collapse.

It is not a fucking currency. It is protection. Jesus why do you people let charletans like this get away with this crap.

You pumpers should ashamed for 2007-2010 pump that cost people 40% of their wealth which you said gold protected them from losing.

You idiots that believed them need to shake your heads.

 

Wake up

Mon, 05/19/2014 - 07:16 | 4772984 Lionhearted
Lionhearted's picture

Paper assets are currency. Gold is money.

Mon, 05/19/2014 - 08:48 | 4773143 d edwards
d edwards's picture

When global currencies collapse, paper assets will be-paper, suitable for wiping your butt or burning as fuel (ask Wiemar Germany.)

Mon, 05/19/2014 - 22:38 | 4776031 bilbert
bilbert's picture

Ummmmm..............  The 40% loss would only apply to those folks who bought Gold at $1900, and Sold at $1300.

I'm guessing that VERY few ZH readers fit that description.

 

Mon, 05/19/2014 - 08:00 | 4773019 TruthTalker
TruthTalker's picture

Does the US have ANY goldleft - not much - these charts are rubbish

Mon, 05/19/2014 - 08:46 | 4773118 withglee
withglee's picture

The fiat currency is the image of the country and its value only depends on the trust people have in its economy. When the international monetary system is on the brink of collapse because of an exorbitant global debt, there is a flux taking place toward real assets (land, buildings, jewelry, gold, silver etc.). Gold is real money, contrary to the different countries’ currencies, which are fiat money and can be devalued by monetisation of the debt.

 

Gold is "not" real money, any more than "land, buildings, jewelry, silver, etc" are real money.

Money is "a promise to complete a trade". This is obvious when you examine trade: (1) Negotiation; (2) Promise to deliver; (3) Delivery.

With simple barter, (2) and (3) happen on the spot. Money represents the promise (2) and allows the delivery (3) to happen over time and space. In the meantime, the money (the promise in certificate form)  trades as an item of simple barter. Managed with the proper integrity, it never loses value (INFLATION is zero and INTEREST is zero to responsible traders). This is guaranteed by the relation: INFLATION = DEFAULT - INTEREST. When a trader fails to deliver as promised (DEFAULTS), the certificates are reclaimed by INTEREST collections.

When that promise is backed, and abused, by a government which openly counterfeits, then as the article says, it loses value. The real value of money is the "integrity" of the traders who make the trading promises and get them certified as money.

When the integrity of the traders goes away, the value of money goes away. We are left bartering "stuff" rather than "real trading promises". The system doesn't totally breakdown, but it runs at a fraction of its potential efficiency. Money makes bartering efficient.

Mon, 05/19/2014 - 09:10 | 4773224 withglee
withglee's picture

I think that the only motivation countries had to store their gold in New York was greed through the possibility to speculate on gold at the risk of losing this “in extremis” reserve.

The reasons owners of gold sometimes store a portion, or even all, of their gold someplace else is of convenience and risk. Gold is "not" money. It is stuff. When traders require gold in trade, that gold must move from the buyer to the seller. That movement is inefficient and risky.

It didn't take a rocket scientist to devise the solution: Put all the gold in one room and move it around in the room ... putting little signs on it. It became a process of record keeping ... record keeping that approached record keeping for a "properly managed medium of exchange (MOE)".

But then this rocket scientist lost his moral compass. He started claiming ownership of the gold himself and moved it to his part of the room. Further, he quit allowing people to look into the room or audit what he was doing.

In 1971 France got wise to this and demanded their gold. This caused the collapse of Bretton Woods. Currently Germany is an example of a trader who got screwed (is getting screwed) by this process. They asked for their gold and were told they would get it back in little pieces over the next several (dozens of) years.

Stealing is stealing and counterfeiting is stealing. No system of trade holds up when thieves cannot be contained and mitigated.

Mon, 05/19/2014 - 09:45 | 4773343 withglee
withglee's picture

Gold is money “in extremis” and is the only real money without any counterparty risk.

In one sentence the writer reveals himself to be clueless.

An item of barter has no counterparty risk ... it is not money. Barter is a "completed trade" so there is no counterparty risk. Money, at its creation, (as "a promise to complete a trade") has counterparty risk. Money (currency) used in barter has no counterparty risk. In barter it completes a trade. Traders value it (currency) for their ability to trade with it. They value it more than gold because it is more efficient and convenient to use. But in such trade it is still an item of barter (no counterparty risk).

The counterparty risk comes with the initial creation of the money by a trader. A trader makes a trading promise and gets it certified. These certificates are currency, coin, accounting entires, etc. and they circulate in the marketplace as items of simple barter as long as the trade is in process. This money makes trade more efficient. During this period of that money's existence, the "whole marketplace" is the counterparty.

When the trader delivers on his promise, he returns the certificates and they are extinguished. If he doesn't complete his trade (DEFAULT), the certificates would be left circulating and they "dilute" the value of other trader's promises. To mitigate this, as soon as DEFAULTs are incurred, they are immediately met with a like amount of INTEREST collections. This guarantees INFLATION to be zero all the time and everywhere. The relation is INFLATION = DEFAULT - INTEREST.

The "whole marketplace" accepts the counterparty risk. They do this because under proper management of the Medium of Exchange (MOE), that risk is zero. There are never DEFAULTed trading promises in circulation. Supply of money is always exactly equal to demand for money ... it's the nature of a trade. Deadbeat traders pay INTEREST and thus are less competitive in the marketplace. If their bad behavior persists, they are shunned from the marketplace. Pawn shops serve such traders. It's a very natural feedback control system and rewards, protects, and thus assures integrity.

We have not had such a system in all of history. Why? Because as Rothschild said "give me control of the money and I care not who makes the laws". No person or government should ever be given control of the money. The traders and the marketplace they make up should never relinquish control of the money they create.

Proper management of the MOE is a very "objective" process. Robots can (and should) do it.

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