Podcast

Harvey Organ: Get Physical Gold & Silver!

Gold & silver prices suppressed with prejudice
Friday, April 20, 2012, 6:10 PM
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Harvey Organ has been analyzing the bullion markets closely for decades. The quality and accuracy of his work is respected enough to have earned him an invitation to testify before the CFTC on position limits for precious metals back in 2010.

And he minces no words: Gold and silver prices are suppressed. With extreme prejudice.

In this detailed interview, Harvey explains to Chris the mechanics of how he sees this manipulation occurring, why he predicts this fraudulent pricing scheme will collapse soon, and why it's critical to be holding physical (vs. paper) bullion when it does.

The real suppression of the metals started in 1988. That’s when the leasing game started and was invented by J.P. Morgan.

These guys would go around to the mining companies and say, Listen, I’m going to pay you for your gold in the ground and I will sell it. You just pay me as you bring it out. So that was cheap financing to the miners. Barrick, the biggest mining company of them all, went in on this and it financed a lot of Nevada projects.

Once the leasing game came, the actual selling, the extra selling, suppressed the price. In the first five years, it started at maybe three hundred to four hundred tons. It didn’t start to get really bad until probably ’97-’98 with the Long Term Capital affair. And that’s when the leasing started to become around maybe 1,000 tons of gold. And it hasn’t stopped.

And silver is the same.

And that’s why you've had a long-term, 20 years of suppression of the metals. The problem now is that the physical is now gone. Where is going? It’s gone from West to East. 

A lot of people don’t know that China used to refine close to 80% of the world’s supplies of silver, because it’s very toxic. Up until probably 1985, the Chinese handled 80% of the world’s refining of silver. Now they're down to 40%, but that’s still a major part of China’s industry. They are keeping every single silver ounce they refine, and gold. They are keeping it for themselves; their reserves are rising (though they don’t tell exactly). Two years ago they went up to 1,054 tons and I can assure you it’s probably triple that now. These guys are not stopping. Just like they are not stopping in oil. They know what the game is, and they are slowly taking all their U.S. dollars that are on their shelf and converting them to gold, oil, copper – anything that’s real.

And the game ends when the last ounce of gold has left London – not COMEX, because in a nanosecond it will come back to here. 

The big problem in London is that their derivatives on gold are about 50 to 100-to-1. That’s the amount of derivatives. So if I take out that 1 ounce, the balloon around it – the derivative – is getting bigger and bigger and bigger until it’s ready to totally implode.

And that’s what you are seeing now. So right now, people are going to say: How high can it go? And I’m going to tell you: You are going to go to sleep on Thursday night and gold may be $1,670. And then you wake up the next day and it’s going to be a banking holiday. And gold will be $3,000 bid, no offer. No offer – and it will be a banking holiday. Because there will be a failure to deliver.

You’ve got to have physical coins or bars. If all you have is a piece of paper – that’s all it is!  It will just blow up in smoke.

So just go buy your physical and be thankful that you are getting it at a cheaper price today.     

Click the play button below to listen to Part I of Chris' interview with Harvey Organ (runtime 32m:36s). 

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To listen to Part 2 - Click Here.


Harvey received his Bachelor of Science degree in 1970 and an MBA in 1972 at McMaster University, majoring in finance. It was during this time period where Harvey got exposed to the derivative market that was just starting on Wall Street.  Harvey has been trying to expose the fraudulent manipulation of the gold market ever since  the "Long Term Capital" downfall in 1998.  It has been Harvey's duty to share what he knows and expose the fraud and educate the intricacies of of the gold and silver paper and physical markets, which he does through his website Harvey Organ's Daily Gold and Silver Report.


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372 Comments

JAG's picture
JAG
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Posts: 2489
Erik T. wrote: I think the

Erik T. wrote:

I think the gold market is headed lower until we get QE3. If June 20 (FOMC) comes and goes with no QE3, I think Gold is headed for the $1300's, maybe lower.

Greetings Erik,

Kudos to your effort in this thread to debunk the goldbug marketing that has strangled the blogosphere for years, but I'm a little surpised to see that you're still swallowing the QE3 rationalization. It might be prudent to purge that little ditty before it can be used against you. 

Why dig for gold when you can make more money selling shovels?

Best,

Jeff

Jim H's picture
Jim H
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QE3 or no QE3...

I am in Erik's camp that QE3 must eventually come...for so many reasons.  If JAG is correct, we will have a deflationary depression that will be so deep, we will probably have to create a new term for it;

recession  <  depression  <  hyperdepression?

JAG... why do you think Ben B (and the world's central bankers) would give up his money printing efforts after working so hard to date to keep world debt stocks level or rising?    

Erik T.'s picture
Erik T.
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Posts: 1232
Not quite as I expected - there's lower to go...

Erik T. wrote:
Something worth watching closely will be the extent of price and volume moves on the U.S. open. My prediction is a considerable downspike right at the open (caused by a whole bunch of stops being triggered when GLD opens), followed by a relief rally through most of the morning. There is plenty of time for the people gaming the market to figure out that's coming, and you can expect a futures ramp to the downside just before the U.S. open - that part is legitimately manipulative, and is designed to artificially lower the opening price and therefore the stop-out price.

Well, it didn't turn out quite as I expected. The initial move after the U.S. cash open was indeed down, but it wasn't instantaneous. That means it wasn't stop orders being triggered that caused the action. Accordingly, there was no futures ramp to the downside in the minutes before the open.

What this says to me is that the stops are lower than I guessed. Remember that the online discount brokers (not central banks per the goldbugs) are the real perpetrators of stop-clearing runs. They have the data to know where the stops are. If there had been a large cluster of stops just below the market, they would have organized a futures ramp in the 2-3 minutes before the open, for the purpose of triggering those stops. The fact that no such thing happened tells me there was no cluster of stops where I guesed there would be one. How nice it must be to be Interactive Brokers or Scott Trade, with a screen in front of you telling you where your customers' stops are so that you can pick their pockets!

So the stops must be clustered lower. My next guess is just below 1550, the base of price formation we're looking at on the daily chart.

The fact that the market is still moving down 10 minutes (now) after the open tells me a lot as well. I expected stops to be triggered, then a relief rally as bottom-believers piled in to buy the bottom. What I'm seeing now tells me we have more downside to go before we test the real support level. The stop cluster I expected never got triggered - it must be lower. And discretionary traders are still selling. It all comes together to paint a picture of a major support level still yet to be discovered below the present market.

All the best,

Erik

JAG's picture
JAG
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Jim H wrote: JAG... why do

Jim H wrote:

JAG... why do you think Ben B (and the world's central bankers) would give up his money printing efforts after working so hard to date to keep world debt stocks level or rising?    

Jim,

I'm not saying there won't be another QE announced someday, I'm saying that the apparent correlation between QE and rising gold prices is so taken for granted by the herd that you can't trust it.

Remember the old ditty "housing prices can't go down?" Someone made a lot of money off of that one.

Best...Jeff

bbacq's picture
bbacq
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@JAG: QE3<>Gold price move?

It is important to consider JAG's words carefully.  Here is why.

The really weird thing about the way things work (or don't!) now that gold is not being used as the basis for currency is that the supply of fiat currency is dictated by the market's perception of the quantity of relatively-rapidly-maturing debt that will be made good upon.  In this, the bankers don't control, they react. 

In this wacky system, the money supply that matters, the one that the "market sees" in setting prices, expands as it observes more short debt being created, and contracts as it sees short debt retired or defaulted upon.  The market may change its view of how short "short" must be to be counted in its perception of money supply.  The market understands that the money bids for the purchase of goods and services, and if there is more supply of money than demand, prices go up, and conversely if less, down.

In 2008, we had a deflationary event driven by the market "suddenly learning" that a bunch of debt was most likely bad, and maybe a lot more.

Thus, in 2008, all prices (in fiat) changed in a correlated way as the market re-evaluated its perception of the "market value" of outstanding debt, ie the money supply.  Correlation is recurring now, as dscribed in this HSBC report as the "RORO trade".

In 2008, the deflationary collapse was halted by printing and bailouts.

John Mauldin spoke (or was it a guest article?) some time ago of the notion of the "liquidity trap" where the market simply has no demand for short debt, ie money, yet is flooded with it through cenral bank printing.  That printing leads to increasing prices is not a given.

In 2012 (or 20??), it is far from impossible that the market will reject the short debt offered by the bankers that it accepted in 2008.  In 2008, we would not have re-inflated if the market didn't believe in the newly "printed" money.  The emergence of RORO trading confirms that the market changed the way it peceived the fiat money system during that event.

Is the situation the same now?  I don't think so, and neither does the market.

In 2008, no one was talking about outright failures of sovereign and super-sovereign currencies, sovereign debt default, etc.

The bankers have created for us and the market a money system that is fundamentally conflicted by a paradox.

As the market loses faith in the debts within the system, the money supply contracts, and prices in fiat will drop.

As the market loses faith in the system as a whole, the supply of fiat money is irrelevant, and more is required to buy real stuff, ie prices in fiat will rise.

The race is now on between failure within the system (deflation) and failure of the system (inflation):  RORO rules now.

In the former case, the fiat price of gold and other PMs will drop.  In the latter, they rise to infinity as the value of fiat goes to zero.

It is now important to consider not just operation of the system as it continues to function, but what happens if and when the system itself no longer is functional.

The market is making such considerations now.  Of course it is conflicted.  The entire experiment has been inverted.  The market feeds on money, and now every time it reaches for the banana, it gets a shock.

This is what leads the market gorilla to break out of its cage, and thus halt the experiment.

Something will have to become money again to replace fiat, and that thing will not behave the same way as other asset classes during the transition.

I submit, for the rationale described above, that precious metals will decouple from other asset classes in the RORO trading to come, because the market understands that they will be required as specie for the next set of currencies.

I would appreciate contructive crticism of this set of ideas.

Thank you for a continuing interesting debate.

bbacq

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CPTWaffle
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Mining Costs - seems higher than Jeff suggests.

Got to say, I have a respect for Jeff Christian but I have my doubts that gold miner's ALL IN costs could be $800 an ounce.

I've read a few articles and earnings reports lately that contradict this. For example, some South African gold miners (who still supply a substantial amount of world supply, declining as it may be) are experiencing costs over $1200 an ounce.

I don't know how the aggregate of all miner's costs figure is derived, just saying that judging by a few earnings reports coming out lately, only the best of the best have all in costs of $700 or lower. On top of that, the (understated) official inflation that we are used to seeing in all countries is going to lead to dramatically higher energy and labour costs from here over the next 2, 3, 5 years.

I have access to much less information and data than Jeff but from where I stand, and in my unprofessional opinion, given recent earnings reports the notion that gold prices have enough slack to roughly halve before the aggregate of gold mining activity starts to go below break-even is bluntly unbelievable. Companies like Harmony Gold, Anglogold and even various Canadian producers would be well and truly underwater at $1000 gold, never mind $800 gold. At the margin, a whole lot of mining companies would feel pain long, long, long before that. Enough companies to matter and affect prices at the margin.

Erik T.'s picture
Erik T.
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bbacq wrote:I would

bbacq wrote:
I would appreciate contructive crticism of this set of ideas.

Ok, I'll take a stab at several points you made.

bbacq wrote:
In 2008, we had a deflationary event driven by the market "suddenly learning" that a bunch of debt was most likely bad, and maybe a lot more.

Thus, in 2008, all prices (in fiat) changed in a correlated way as the market re-evaluated its perception of the "market value" of outstanding debt, ie the money supply.  Correlation is recurring now, as dscribed in this HSBC report as the "RORO trade".

In 2008, the deflationary collapse was halted by printing and bailouts.

I agree with most of that, but it's also important to remember (and few seem to) that the suspension of FASB 157 (mark-to-market accounting) was the proximal trigger for the reversal of equity markets in March 2009. What was happening was classic debt deflation - nobody wanted MBS - subprime or otherwise - and the balance sheets of the institutions that already held the stuff were collapsing. The crisis was averted - to my utter amazement - by simply changing the accounting rules to allow banks to pretend those assets are worth more than they really are. That was not a "temporary, emergency measure" - it's a permanent change that remains with us today. Nobody actually knows whether the banking system is solvent or not, because the government has decided the answer to that question is too scary, so we're "better off" not knowing the answer! This really isn't an exaggeration. This has to end badly, but to my own astonishment, everyone seems happy to pretend there is no problem. If I have learned anything from this, it is that it takes longer than I thought for people to wake up and understand the big picture.

bbacq wrote:
John Mauldin spoke (or was it a guest article?) some time ago of the notion of the "liquidity trap" where the market simply has no demand for short debt, ie money, yet is flooded with it through cenral bank printing.  That printing leads to increasing prices is not a given.

In 2012 (or 20??), it is far from impossible that the market will reject the short debt offered by the bankers that it accepted in 2008.  In 2008, we would not have re-inflated if the market didn't believe in the newly "printed" money.  The emergence of RORO trading confirms that the market changed the way it peceived the fiat money system during that event.

Personally, I avoid the phrase liquidity trap because its meaning has changed over the years, and different people using it in different ways leads to confusion and miscommunication. When Keynes originally coined the term, he was talking about the scenario where a liquidity injection fails to reduce interest rates as central bankers presumably intended. But ZIRP in Japan in the '90s brought new meaning to the term - suddenly people used "liquidity trap" to describe the "trap" central banks fall into when interest rates reach the zero bound, and it therefore becomes impossible to reduce them by injecting liquidity to the system.

I'm not criticizing you on this bbacq - just suggesting that you be ready for different people to read different meanings into your words when you talk about liquidity traps. I also make a point of never using the word "inflation" without qualifying exactly what I mean. Some people think inflation means rising consumer prices. Others think it means rising money supply. Others think it means rising aggregate money and credit (perhaps the most useful definition). But if you use the term in isolation, you're almost guaranteed to confuse people who are stuck on a different meaning than yours.

bbacq wrote:
In 2008, no one was talking about outright failures of sovereign and super-sovereign currencies, sovereign debt default, etc.

I beg your pardon, but please speak for yourself. I most certainly was talking about these things going back to 2006, and so was Chris Martenson going back even farther. Perhaps what you mean is that these rather obvious risks have now begun to reach the consciousness of the masses. That I would agree with.

bbacq wrote:
The bankers have created for us and the market a money system that is fundamentally conflicted by a paradox.

As the market loses faith in the debts within the system, the money supply contracts, and prices in fiat will drop.

As the market loses faith in the system as a whole, the supply of fiat money is irrelevant, and more is required to buy real stuff, ie prices in fiat will rise.

The race is now on between failure within the system (deflation) and failure of the system (inflation):  RORO rules now.

In the former case, the fiat price of gold and other PMs will drop.  In the latter, they rise to infinity as the value of fiat goes to zero.

It is now important to consider not just operation of the system as it continues to function, but what happens if and when the system itself no longer is functional.

The market is making such considerations now.  Of course it is conflicted.  The entire experiment has been inverted.  The market feeds on money, and now every time it reaches for the banana, it gets a shock.

This is what leads the market gorilla to break out of its cage, and thus halt the experiment.

I have a slightly different perspective. Back in 2008, my belief (shared by quite a few people at the time) was that it would be obvious to markets that printing money and diluting the value of the currency couldn't possibly work in the long run. I reasoned that the Fed was out of useful bullets once we hit the zero bound in interest rates, because I thought QE - outright money printing - would be recognized for the desperate measure it truly is, and that markets would revolt because of a loss of faith in the system.

I couldn't possibly have been more wrong. What happened is that (as David Tepper is often credited with first saying publically), freshly printed money has to go somewhere, and where it went was to bid up risk asset prices. More money = higher prices, and no discernable increase in concern about the stability of the system! Since 2009 it's been just that simple, and so far the long-term perils of money printing are a popular topic only among people like us, who are considered "fringe extremists". So far, these concerns are ignored almost completely by the mainstream.

The RORO trade emerged as everyone figured out that Fed money printing has a LOT more influence on asset prices than conventional fundamentals. When people think more QE is imminent, they start buying. Asset prices all go up together in reaction to anticipation of more freshly printed fiat (risk on). That includes upward moves in prices of assets that have traditionally had a negative correlation, such as equities and gold. Eventually that gets overdone or there is reason to think the Fed will back off on QE, and everyone wants out as deflation begins to rear its ugly head again (risk off), as is happening right now.

The whole reason this is working is that it HAS been working. So far, anyway. Everyone has adjusted to a "new normal" perception where few dare to short the market or even be flat, because "everyone knows" they can count on Benny and the Inkjets to print more fiat to save the market if it starts to crash. In reality, Ben can only print so long as inflation doesn't become a big problem, but few seem to grasp that. Those who do are quick to dismiss the concern, thinking that because the CPI has been moderate, "there is no inflation". To my utter astonishment, they completely ignore commodity prices. All of this sets up the really big risk event that I see coming in the next couple of years.

I think the really big event comes when further QE fails to lift asset prices, surprising most market participants, or when further printing becomes impossible because oil prices have been elevated to the point of causing a gas price political crisis. In other words, it's when the Bernanke Put (which everyone took for granted) doesn't materialize that all hell breaks loose. The reasoned thinking of people like Ron Paul who can see what's coming isn't even remotely interesting to the Washington policy machine. But $7 gasoline prices will change everything, almost overnight, as Washington goes into reactive crisis response mode - the only thing it knows.

I contend that the whole 2009-Present experience has been a fantasy mirage, resulting directly from the widespread (and so far correct) belief that no matter what happens, the Fed will save the markets from crashing. The day that the market wakes up and recognizes that Ben can't save the markets any more, we'll see a crash that will make 2008 look like fender bender. Watch for signals that sitting congresspeople are at risk of being thrown out (becoming un-re-electable) "unless something is done" about gas prices. Intelligent, forward looking analysis and insight (a la Ron Paul) is completely irrelevant. Congresspeople waking up and recognizing that their career in politics will END with the next election unless they take away Ben's printing press will change everything, instantly.

bbacq wrote:
Something will have to become money again to replace fiat, and that thing will not behave the same way as other asset classes during the transition.

I submit, for the rationale described above, that precious metals will decouple from other asset classes in the RORO trading to come, because the market understands that they will be required as specie for the next set of currencies.

I used to think that myself, but my view has evolved. The key is the part about the (broader, mainstream) market "understanding" this stuff. I don't think they do. People who have been interested in PMs for years have the idea in their heads that we "just have to" go back to a gold-backed currency because it's what's always happened throughout history. But if you actually go back and study that history, you'll find that major wars are often needed before people recognize what you are taking for granted as obvious. Just watch the mainstream cable channels - Bloomberg and CNBC really are a good proxy for the general level of comprehension in the market. Most people continue to view gold and silver as "barbaric relics", and the guys who most people foolishly perceive to be the smartest investors in the world just went on record as saying that civilized people don't buy gold! This is very telling, and it's a message goldbugs sadly seem to miss.

There are PLENTY of other options to a gold-backed currency, including a global fiat currency. Stop and consider the scenario where the world recognizes the failings of national fiat currencies, and there is a general consensus we need something else. The options being debated are global fiat administered by a global CB (perhaps an outgrowth of today's Fed), or a return to the gold standard. Forget your own opinion, and think in terms of what would likely happen on the stage of public opinion. All the people with the most power and influence in the world will see this as a choice of more power for the elite (global fiat), or a profound loss of power for them (gold standard). So it would come down to a public debate between the most powerful people in the world - Nobel Prize winners like Paul Krugman and the folks who OWN the media - vs. some Austrian economists nobody ever heard of. The latter group might actually know better, but who would win the contest for public opinion?

In summary, history shows that you always go back to a PM-backed currency, but when you study that history closely you realize we're a long way from that point. It usually takes complete wipe-outs (hyperinflations) of fiat currencies and/or major wars to get the world to wise up. All the goldbugs who repeatedly insist that we're headed back to gold-backed currency would do well to research what it's taken in the past to get a society to recognize that neeed. I'm sad to say it, but we haven't felt nearly enough pain yet.
 

All the best,

Erik

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Travlin
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Can you really see this happening?

Erik T. wrote:

 

There are PLENTY of other options to a gold-backed currency, including a global fiat currency.

Erik

I agree with what you said and your reasons for this path. The World Bank would love to have Special Drawing Rights (SDRs) become the world currency. BUT, the failing Euro has demonstrated that monetary union requires fiscal union, and that requires nations to essentially yield their sovereignty as well. I have no doubt that powerful people would like to see that happen, but with the increased chaos that is resulting in Europe that would be a very hard sell. I expect the next 12 months will provide a clear example of disaster.  I think self preservation would overcome the hope that extending a failed system to a global scale would be an improvement. Can you really see this happening anyway?

Travlin

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Case in point

http://www.reuters.com/video/2012/05/17/economy-2012-gold-fields-ceo-say...

Gold Fields CEO has a very different view from Jeff Christian on industry costs.

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Travlin wrote: Erik T.

Travlin wrote:

Erik T. wrote:
 

There are PLENTY of other options to a gold-backed currency, including a global fiat currency.

Erik

I agree with what you said and your reasons for this path. The World Bank would love to have Special Drawing Rights (SDRs) become the world currency. BUT, the failing Euro has demonstrated that monetary union requires fiscal union, and that requires nations to essentially yield their sovereignty as well. I have no doubt that powerful people would like to see that happen, but with the increased chaos that is resulting in Europe that would be a very hard sell. I expect the next 12 months will provide a clear example of disaster.  I think self preservation would overcome the hope that extending a failed system to a global scale would be an improvement. Can you really see this happening anyway?

Travlin

Trav,

Unfortunately, YES, I really can see something along these lines happening.

It's a matter of context. Yes, I agree with you 100% that Europe proves the shortcomings of currency unions without fiscal unity. But remember, the bottom line on the gold standard is always that having one robs the most powerful people in the world of some of their power. My view is NOT that a global currency is a good idea - I think it could lead to global mayhem. Furthermore, although I cited a global fiat currency as an example, my real point was that the people with all the power will do whatever they can to avoid a gold standard. Global fiat is just one possible alternative they might propose.

I also think it's easy to imagine how they would twist ideas around to make it sound like the Euro debacle somehow serves as evidence that global fiat is a GOOD idea. I know, I know - that's utter nonsense. But people like Krugman are so good at reciting nonsense with a straight face that they get Nobel prizes for doing so. The VAST majority of the people who need to be influenced (electorates of the powerful nations) are economically clueless, and incapable of having their own ORIGINAL opinions. Their views will be shaped by credentials and political ideology, not by what makes the most sense.

In summary, my advice is to stop thinking about what SHOULD happen (I agree wholeheartedly a gold standard is the answer to that), and start thinking about what the most powerful and influential people in the world will try to make happen instead in order to retain or increase their power. A gold standard robs them of the ability to fund their largesse with printed money, as opposed to just tax revenues. They will figfht tooth and nail to prevent that outcome from happening.

Again, believe me, I get it! But you have to remember, the vast majority of people on this planet think guys like Krugman have the answers, and they're not going to listen to reason from goldbugs and austrian economists who aren't even taken seriously on the public stage. If they did, Ron Paul would have already secured his party's nomination - instead, he just dropped out of the race. I'm sorry to say it's going to get a lot worse for a long time before it gets better.

Erik

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re: Mining Costs

CPTWaffle,

I kept quiet after my earlier post on this was rebutted by Jeff. I feel less than a minnow in this epic thread and have no credentials that give me the right to question people like him. But I agree with you. I have heard compelling anecdotal evidence that miners try to disguise their true capital costs. Not sure where Jeffs data comes from - if it is "deep" from detailed analysis of company and individual project finances or shallow  from annual reports and the like. If the latter, then I reserve my judgement. 

But before getting too hung up on this point I would like to know whether it matters. We have heard in this thread opinions from Victor and Bron (I think) that cost of production has almost no bearing on the gold price - it is the reluctance of existing holders of gold to part with it that is more important. This opinion seems to contradict Chris Martensons own opinion recently expressed in a podcast that the cost of production sets the price floor. 

if Chris is right, then yes it really matters whether gold costs $800 an ounce or $1200+ to produce.

I went to visit the Perth mint with my mother the other day to see what is involved in buying gold. If Chris is right then I would believe that gold cannot fall much further and we would both be buying it. So this is a very important issue and I look forward to reading responses on these points.

Thanks everyone for a GREAT discussion.

John

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Erik T.
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Cost of production

A friend who owns two small private gold mines tells me cost of production varies hugely from one mine to the next. There are apparently SOME mines with very high quality deposits where the cost of production is still below $500. My friend lamented that quality deposits/favorable operating costs like that are so rare now that the cost to buy a mine like that carries a huge premium. But they do exist. My friend's mines have $900ish cost of production, which he said was on the high side of industry average, but in his experience the best you can do if you are buying a small mine (like his) with private funding.

On the question of "does it matter", the answer (to be certain) is that it matters at least a little, but probably (in my opinion) not that much. One thing that is certain is that some gold projects have incremental cost of production of $1200 or even higher. No doubt about that. As the price falls thru that figure and stays there, those projects become uneconomic and may be taken offline, slightly reducing supply.

The answer to "does it matter" depends on where the metal is coming from to meet demand. It's a totally different equation for Silver, where the metal gets "used up" in industrial applications, and mine supply is more important. But in the case of gold, all of it - every ounce that's ever been mined save for just a little waste in electronic partsand other small waste uses - is owned by somebody. They all have their price, and it changes with circumstances and perceptions of future market direction.

If the price of gold fell to and stayed at $1000, it would definitely take some supply offline. But I doubt it would amount to enough to make any real difference.

Erik

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bbacq
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Even 12-year-olds get it!

My, you seem to enjoy bloviating and picking nits, Erik.  Is this your blog, or someone else's?  You exude proprietoral condescension in your words.  I thank either you or the actual operator for tolerating my presence here.

I'll address a couple of points by you and others.

Cost of extraction effect on price of gold:  Hoarding and dishoarding are far more important sources/causes of demand and supply, respectively, than actual physical consumption and production.  Gold derives most of its value from its monetary function.  If it is needed in order to be money, it has high value to the market, if not, it is valued lower.  Production costs may affect individual mines greatly, but much less the overall market price.  Only in a case where supply elasticity through dishoarding dropped dramatically (eg if fiat was obviously dead, and "from my cold dead hands" sets in everywhere) would production costs matter much.

"I beg your pardon, but please speak for yourself. I most certainly was..."  Too funny.  You don't miss a chest-beat do you, Erik!  Since you want to play, I'll say we would have to go back decades to find my first thoughts on default and currency failure.  Um, "no-one" need not always be taken in its strict literal sense, Erik, I think you are getting a little self-centered.

"I think the really big event comes when further QE fails to lift asset prices" I think you completely miss my point, or get it backwards, or want to get it backwards, or something.  Quite to the contrary, the big event, ie the market rejection of fiat, occurs when despite tight monetary policy, prices rise anyway, because people know the clock is running down for trading their paper into something more useful, like PMs, food, land etc.  Like the eighties, but on steroids.  You don't seriously believe they aren't still desperately trying to inflate this leaky balloon do you?

"The key is the part about the (broader, mainstream) market "understanding" this stuff. I don't think they do."  There is no "they" in "market" to understand things in the way I am using the term, Erik.  The market itself thinks, the market remembers, the market computes prices.  My neurons don't think, my brain does. 

"People who have been interested in PMs for years have the idea in their heads that we "just have to" go back to a gold-backed currency because it's what's always happened throughout history. But if you actually go back and study that history, you'll find that major wars are often needed before people recognize what you are taking for granted as obvious. Just watch the mainstream cable channels - Bloomberg and CNBC really are a good proxy for the general level of comprehension in the market. Most people continue to view gold and silver as "barbaric relics", and the guys who most people foolishly perceive to be the smartest investors in the world just went on record as saying that civilized people don't buy gold! This is very telling, and it's a message goldbugs sadly seem to miss."

Oh, that IS rich Erik.  You are seriously inside the box. "If I actually go back and study history????"  LOL!!  It is through the study of history that I find truth, Erik, and it is by listening to talking heads on Bloomberg and CNBC that good people are deceived.  A study of history reveals that the only kind of currency that can stand market-tests are those backed by specie.  It's how the west was won (apologies to any Native Americans in the audience, its just an expression). 

It's also true that gold-backed currencies have failed market tests.  The reason they all failed is that they were implemented coercively.  Coercion does not lead to truth, the market demands truth, and the market always eventually eliminates coercion.  It might slowly take an entire empire down with it, as it did with the Romans, or we can use our heads, and avoid a few hundred years of bad times.  There was a time in history when most people didn't sit in Plato's cave watching Munger's, Gates', and Buffet's shadows dance, and instead went outside to see reality, and they didn't retreat back in fear.

"major wars are often needed before people recognize..."?  Really?  I'd like to think they can be enlightened otherwise this time.  Have we ever had an internet before?  Could it be different this time?

"goldbugs": please.

The only possible stable answer is competing privately-issued specie-backed currency, with no coercion, so that when the market tests the currency, and an issuer is over-extended, it doesn't take the whole currency down with it, just the dope who embezzled.  Maybe bitcoin-like schemes will eventually prove possible, but, for now, the only way to ensure money-supply limitation is by ensuring the appropriate disincentives exist, and they don't in central banking.

"There are PLENTY of other options to a gold-backed currency, including a global fiat currency."
I agree.  All the other options are just inferior, that's all.

"Forget your own opinion... I'm sad to say it, but we haven't felt nearly enough pain yet."
Why on earth would one want to do that.  I am instead spreading not my opinion, but truths discovered by others, in order to avoid the pain.

I think maybe the general public is getting the drift, via the internet.  Check out this 12-year-old girl, for instance (I hope that everyone forwards that link to a friend - she nails it. ). She has the problem correctly identified, but fails at the last step in advocating public central bank currency issue.  That system, just like the private central systems like the Fed and BIS, doesn't have disincentives for over-printing.  The only one that works very well, best of a bad lot, is multiply-issued competing private gold-backed currency, if anything other than PM coinage is to be used, and, these days, reverting to coin would certainly slow things down a lot.

All it takes now is a few informative viral videos for the as-yet uninformed (rember Joe the Plumber?), coupled with the informed already knowing the system is a crock, and it comes down, and we move on.  HIstory tells us it is going to take a long time?  Erik, did the Romans have an Internet?  Hundreds of trillions in derivatives of dubious value?

Erik, your contribution to society would be greater if instead of attempting to predict how things will play out within an existing corrupt and broken system, you focussed on the alternative that works.  The way you argue - broadbrushing swathes of society, appealing to the authority of coercive bozos - makes me think you have an agenda. 

I say let's hurry up and get to competing specie-backed currencies.  I think the market is saying the same thing.

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@bbacq

Thanks for the laugh, bbacq. Next time you expressly request feedback on your thoughts, I'll know better than to assume you actually have a sincere interest in respectful intellectual discourse with someone who disagrees with some of your views.

bbacq wrote:
"I think the really big event comes when further QE fails to lift asset prices" I think you completely miss my point, or get it backwards, or want to get it backwards, or something.

I wasn't commenting on your point; I was making my own point. Hence the words "I think..." at the beginning of the sentence. It appears that you believe yourself to be a greater expert than I am on the subject of what *I* think! That's rather amusing, bbacq. I won't bother commenting on the rest of your missive, as it's now clear you have no sincere interest in thoughtful discourse, but are here only to rant about your own beliefs.

All the best,

Erik

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$900 private miner costs

Hi Erik

When your friend talks about a $900 cost of production, is that just operating costs or has he factored in capital expenditure and maintenance too?

Cheers

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Gareth wrote: Hi Erik When

Gareth wrote:

Hi Erik

When your friend talks about a $900 cost of production, is that just operating costs or has he factored in capital expenditure and maintenance too?

Cheers

My understanding is that the $900 figure is "fully loaded" and includes CapEx, but does NOT include the cost of acquiring the property itself. I'll ask him next time I talk with him, and post again if anything is different.

All the best,

Erik

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bbacq

Erik beat me to it. And much more polite. Please refrain from ad hominem attacks, they cheapen your responses.

"The key is the part about the (broader, mainstream) market "understanding" this stuff. I don't think they do."  There is no "they" in "market" to understand things in the way I am using the term, Erik.  The market itself thinks, the market remembers, the market computes prices.  My neurons don't think, my brain does. 

I still do not understand your meaning, please explain.

There was a time in history when most people didn't sit in Plato's cave watching Munger's, Gates', and Buffet's shadows dance, and instead went outside to see reality, and they didn't retreat back in fear.

Please enlighten me as to when that was.

 we can use our heads, and avoid a few hundred years of bad times. 

"major wars are often needed before people recognize..."?  Really?  I'd like to think they can be enlightened otherwise this time.  Have we ever had an internet before?  Could it be different this time?

I hope it can be. However it seems to me that with all our whiz-bang gizmos and such the human animal has not evolved in a positive manner is 5000 years or so. History may not repeat itself, but we sure seem to interact with each other the same.

A study of history reveals that the only kind of currency that can stand market-tests are those backed by specie.

What is your definition of market-tests?.

Specie-backed currencies, as you pointed out, have been manipulated in most if not all cases. It would be great if the current money masters would willingly give up their power to be replaced by your private competing minters in a non coercive system. My thought there is that currently, those that hold the most gold are the ones making the rules and will fight tooth and nail to keep it. My personal opinion is that their power is so great and their morals so low that modern society would not survive the war that brings that change. Even if enough people were ever to awaken and band together before communication was severed to attempt that change the others in the cave of Prussian education would surely kill them. At least we would finally find out if Yamashita's gold is fact or fiction.

Nathan Martin's opinions on gold backed currency make sense to me. Perhaps the longest running currency was completely fiat based and worked until specie-backed currency was forced on the populace. I'm referring to Tally Sticks. A benevolent master of all might be the most peaceable end even if we do get the short end of the sticks. But I digress.

Welcome to the site.

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Tycer...

Tycer et al, in my continuing quest to understand the other side of the gold/silver trade (i.e. what could go wrong with my bullish thesis) am intrigued by your reference to Nathan Martin and am off to 'google' for additional information ... anything to speed up my process from your perspective appreciated.

Btw, thinking of the Blue Ridge Parkway brought back fond memories from childhood years ago - thx ...

Kudo's to this thread & all who have contributed as my ongoing education on precious metals / PM mining industry has improved ... navigating wealth mgmt as we are all living financial history in realtime IMO.

disc: long bullion & select miners since 2004ish

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Cottonbelt21 wrote: Tycer et

Cottonbelt21 wrote:

Tycer et al, in my continuing quest to understand the other side of the gold/silver trade (i.e. what could go wrong with my bullish thesis) am intrigued by your reference to Nathan Martin and am off to 'google' for additional information ... anything to speed up my process from your perspective appreciated.

Btw, thinking of the Blue Ridge Parkway brought back fond memories from childhood years ago - thx ...

Kudo's to this thread & all who have contributed as my ongoing education on precious metals / PM mining industry has improved ... navigating wealth mgmt as we are all living financial history in realtime IMO.

disc: long bullion & select miners since 2004ish

http://economicedge.blogspot.com/2010/01/fallacy-of-gold-backed-money_02...

The parkway in my area is beautiful. Great hiking all along it. Come back sometime.

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@Gareth et al - Cost of production

Turns out my friend sold his gold mine, so he didn't have current figures from his own operation. But he did have some interesting comments I hadn't thought of.

He said his best guess for all-in incremental production cost industry-wide was probably $800 - $1000 - right about where Jeff reported. But he also commented that mining operations generally have several different deposit quality levels in different parts of their properties. He said that privately held miners generally work the lowest grade that is economic to produce, because that saves their best grades for a depressed market situation where you need some higher-grade deoposits to keep the operation going with positive cashflow.

Obviously, the economics could be different in a publically held operation, where management may be incented to work their highest grades first always, to show the highest profits and boost share prices.

Seems like a good diligence topic for operating producers - what different deposit grades do they own in the ground, and which ones are they currently producing? The long-term value guys should be saving their best deposits for a rainy day when they are needed to keep operations in the black. I'd be surprised to find all of them doing that, however.

Erik

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My comment on this thread is this;

Yes, it's anecdotal... but I trust this guy, regardless of those who would distrust anything published on Kingworld news.  If you have not read Egon von Greyertz, please read this;

http://goldswitzerland.com/deus-ex-machina-egonvongreyerz/

Anyway, without further ado, here is my comment, cut and pasted from Egon;

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/21_Gr...

“We are stressing to investors to take their gold out of the banking system, not only because there are runs on banks that will continue, but the risk of being in the banking system is major.  So you should take the additional step of not just owning physical gold, but also owning it outside of the banking system.

We (just) had an example of a client moving a substantial amount (of gold) from a Swiss bank to our vaults, and we found out the bank didn’t have the gold.  This was supposed to be allocated gold, but the bank didn’t have it.  We didn’t understand why there was a delay (in our vaults receiving the gold), but eventually we found out why there was a delay (the bank didn’t have the gold).  It’s absolutely amazing, but not surprising.

This confirms what I’ve always thought.  Not only should you not have gold in banks or even unallocated gold, but even allocated gold.  It seems that some banks don’t even possess that.  So the risk of having gold in the banking system is major.”

It's all bull folks...  regardless of what has been said in this thread, I trust that the Gold in PHYS is there.. because Sprott is not a banker.  For shares he owns, he can sell me out for the premium if he wants.. but I trust the Gold is there.  Banks.. not so much.  Bullion banking is a ponzi scheme that will crash in the end, allocated or not.  Kyle Bass came to the same conclusion.  Got physical Gold?  

This thread has been filled with the arcane details of man-made rules for banking, contract law, etc.  Personally, I really just don't care about that.. because in the end it's all so simple.. none of that matters at all.  Our paper money system is fatally flawed..  it's so easy to see that a child can understand it.  For example, the entire derivatives market has been laid upon a debt-based money system without funding.. .i.e. regardless of how the derivatives supposedly net out.. there is not enough money is existence to begin making the payouts once the collapse starts.  It's not just counterparty risk.. the money does not exist, period.   If you can visualize this... a debt based money system with a giant derivatives laden boat anchor just waiting to be thrown overboard.. then you understand that there is no reforming the system.  It must blow up.  Only real assets will be left on the other side.               

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allocated gold

Jim,

what you are citing doesn't really make sense.

If you own allocated gold, you have a list with the serial numbers, production years, and refiners of the individual gold bars you own. From what Greyez says, I doubt that the client owned allocated gold.

What I am ready to believe though is that many banks sell their customers gold-related products with very nice marketing-speak and fancy brochures, that these products are not allocated gold, and that the customers are led to believe and want to believe that they own gold when in fact they merely own a claim against a bank.

Victor

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Thanks Erik.

Erik T. wrote:

...................................

I agree with most of that, but it's also important to remember (and few seem to) that the suspension of FASB 157 (mark-to-market accounting) was the proximal trigger for the reversal of equity markets in March 2009. What was happening was classic debt deflation - nobody wanted MBS - subprime or otherwise - and the balance sheets of the institutions that already held the stuff were collapsing. The crisis was averted - to my utter amazement - by simply changing the accounting rules to allow banks to pretend those assets are worth more than they really are. That was not a "temporary, emergency measure" - it's a permanent change that remains with us today. Nobody actually knows whether the banking system is solvent or not, because the government has decided the answer to that question is too scary, so we're "better off" not knowing the answer! This really isn't an exaggeration. This has to end badly, but to my own astonishment, everyone seems happy to pretend there is no problem. If I have learned anything from this, it is that it takes longer than I thought for people to wake up and understand the big picture.

.......................................

Personally, I avoid the phrase liquidity trap because its meaning has changed over the years, and different people using it in different ways leads to confusion and miscommunication. When Keynes originally coined the term, he was talking about the scenario where a liquidity injection fails to reduce interest rates as central bankers presumably intended. But ZIRP in Japan in the '90s brought new meaning to the term - suddenly people used "liquidity trap" to describe the "trap" central banks fall into when interest rates reach the zero bound, and it therefore becomes impossible to reduce them by injecting liquidity to the system.

I'm not criticizing you on this bbacq - just suggesting that you be ready for different people to read different meanings into your words when you talk about liquidity traps. I also make a point of never using the word "inflation" without qualifying exactly what I mean. Some people think inflation means rising consumer prices. Others think it means rising money supply. Others think it means rising aggregate money and credit (perhaps the most useful definition). But if you use the term in isolation, you're almost guaranteed to confuse people who are stuck on a different meaning than yours.

................................

I beg your pardon, but please speak for yourself. I most certainly was talking about these things going back to 2006, and so was Chris Martenson going back even farther. Perhaps what you mean is that these rather obvious risks have now begun to reach the consciousness of the masses. That I would agree with.

..............................

I have a slightly different perspective. Back in 2008, my belief (shared by quite a few people at the time) was that it would be obvious to markets that printing money and diluting the value of the currency couldn't possibly work in the long run. I reasoned that the Fed was out of useful bullets once we hit the zero bound in interest rates, because I thought QE - outright money printing - would be recognized for the desperate measure it truly is, and that markets would revolt because of a loss of faith in the system.

I couldn't possibly have been more wrong. What happened is that (as David Tepper is often credited with first saying publically), freshly printed money has to go somewhere, and where it went was to bid up risk asset prices. More money = higher prices, and no discernable increase in concern about the stability of the system! Since 2009 it's been just that simple, and so far the long-term perils of money printing are a popular topic only among people like us, who are considered "fringe extremists". So far, these concerns are ignored almost completely by the mainstream.

The RORO trade emerged as everyone figured out that Fed money printing has a LOT more influence on asset prices than conventional fundamentals. When people think more QE is imminent, they start buying. Asset prices all go up together in reaction to anticipation of more freshly printed fiat (risk on). That includes upward moves in prices of assets that have traditionally had a negative correlation, such as equities and gold. Eventually that gets overdone or there is reason to think the Fed will back off on QE, and everyone wants out as deflation begins to rear its ugly head again (risk off), as is happening right now.

The whole reason this is working is that it HAS been working. So far, anyway. Everyone has adjusted to a "new normal" perception where few dare to short the market or even be flat, because "everyone knows" they can count on Benny and the Inkjets to print more fiat to save the market if it starts to crash. In reality, Ben can only print so long as inflation doesn't become a big problem, but few seem to grasp that. Those who do are quick to dismiss the concern, thinking that because the CPI has been moderate, "there is no inflation". To my utter astonishment, they completely ignore commodity prices. All of this sets up the really big risk event that I see coming in the next couple of years.

I think the really big event comes when further QE fails to lift asset prices, surprising most market participants, or when further printing becomes impossible because oil prices have been elevated to the point of causing a gas price political crisis. In other words, it's when the Bernanke Put (which everyone took for granted) doesn't materialize that all hell breaks loose. The reasoned thinking of people like Ron Paul who can see what's coming isn't even remotely interesting to the Washington policy machine. But $7 gasoline prices will change everything, almost overnight, as Washington goes into reactive crisis response mode - the only thing it knows.

I contend that the whole 2009-Present experience has been a fantasy mirage, resulting directly from the widespread (and so far correct) belief that no matter what happens, the Fed will save the markets from crashing. The day that the market wakes up and recognizes that Ben can't save the markets any more, we'll see a crash that will make 2008 look like fender bender. Watch for signals that sitting congresspeople are at risk of being thrown out (becoming un-re-electable) "unless something is done" about gas prices. Intelligent, forward looking analysis and insight (a la Ron Paul) is completely irrelevant. Congresspeople waking up and recognizing that their career in politics will END with the next election unless they take away Ben's printing press will change everything, instantly.

I used to think that myself, but my view has evolved. The key is the part about the (broader, mainstream) market "understanding" this stuff. I don't think they do. People who have been interested in PMs for years have the idea in their heads that we "just have to" go back to a gold-backed currency because it's what's always happened throughout history. But if you actually go back and study that history, you'll find that major wars are often needed before people recognize what you are taking for granted as obvious. Just watch the mainstream cable channels - Bloomberg and CNBC really are a good proxy for the general level of comprehension in the market. Most people continue to view gold and silver as "barbaric relics", and the guys who most people foolishly perceive to be the smartest investors in the world just went on record as saying that civilized people don't buy gold! This is very telling, and it's a message goldbugs sadly seem to miss.

There are PLENTY of other options to a gold-backed currency, including a global fiat currency. Stop and consider the scenario where the world recognizes the failings of national fiat currencies, and there is a general consensus we need something else. The options being debated are global fiat administered by a global CB (perhaps an outgrowth of today's Fed), or a return to the gold standard. Forget your own opinion, and think in terms of what would likely happen on the stage of public opinion. All the people with the most power and influence in the world will see this as a choice of more power for the elite (global fiat), or a profound loss of power for them (gold standard). So it would come down to a public debate between the most powerful people in the world - Nobel Prize winners like Paul Krugman and the folks who OWN the media - vs. some Austrian economists nobody ever heard of. The latter group might actually know better, but who would win the contest for public opinion?

In summary, history shows that you always go back to a PM-backed currency, but when you study that history closely you realize we're a long way from that point. It usually takes complete wipe-outs (hyperinflations) of fiat currencies and/or major wars to get the world to wise up. All the goldbugs who repeatedly insist that we're headed back to gold-backed currency would do well to research what it's taken in the past to get a society to recognize that neeed. I'm sad to say it, but we haven't felt nearly enough pain yet.
 

All the best,

Erik

Erik,

These analyses are very astute; very insightful. I won't pretend to speak for others, but it's very comforting to me to know that economic neophytes can find reliable, knowledgable and most of all, trustworthy , information in these troubling times. For this I am grateful to you and all the others who participated in this thread (and other threads as well.)

It's because of quality posts like this (and many others) that I'm convinced that CM.com has got the deepest bench on the net.

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victorthecleaner

victorthecleaner wrote:

Jim,

what you are citing doesn't really make sense.

If you own allocated gold, you have a list with the serial numbers, production years, and refiners of the individual gold bars you own. From what Greyez says, I doubt that the client owned allocated gold.

What I am ready to believe though is that many banks sell their customers gold-related products with very nice marketing-speak and fancy brochures, that these products are not allocated gold, and that the customers are led to believe and want to believe that they own gold when in fact they merely own a claim against a bank.

Victor

Victor,

Isn't it possible that the client did have a list with serial numbers etc. and the bank sold their gold nonetheless? That would account for the outrage and incredulity noted.  In today's world, it would be just one more outrageous ripoff that gets swept under the rug.

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Safety of "Allocated"oulss

@Earthwise

Thanks so much for the very kind words. Made my day! :-)

@Victor

I agree that this story is hard to believe, and my first thought was the same as yours - perhaps the client in question had an unallocated account and just wasn't astute enough to realize what had been sold to them. If I remember correctly, the Lenny/Harvey Organ vs. Scotia Mocatta debacle a couple of years ago was a similar affair.

But that said, post MF Global I've changed my views. Yes, we agree that allocated buillion is titled to the investor, not the bank, and CAN NOT be sold to a third party BY LAW. But there was plenty of nasty stuff than CANNOT HAPPEN BY LAW that happened anyway in MF Global, including (I'm told) some customers who had allocated metal (COMEX Warehouse receipts) that were sold by the trustee and pooled to pay off the other non-secured claimants.

My point is, the reason most people concern themselves with allocated bullion in the first place is to hedge the tail risk of an all-out financial system collapse. In that scenario, my guess is that governments would step in and change the rules. Consider a case where there is a global bank run, and all the banks are bust. The pitifully under-reserved FDIC system goes bankrupt in 20 minutes, and the US Gov't now has to figure out what to do. I could easily see them declaring that all assets in the bank vaults get pooled "for the common good" and used to make sure the masses can somehow continue to feed their children.

I am fully aware that what I have just described is "impossible" as a matter of property law, since the banks don't even own the allocated metal in their vaults, and there is no precedent of law authorizing the government to reallocate private property to the banking system. Consider that it's also "impossible" for American Citizens to be subjected to indefinite detention or extra-judicial assasination. But despite these things being prohibited by the Constitution, both are now openly acknolwedged policy. Indefinite detention seems to have been struck down by a federal judge, but in time of crisis I think the US Gov't will do whatever it wants.

My point is, in the extreme circumstance that allocated accounts are designed to hedge for, I think all bets could be off and the rule of law could easily be suspended.

Problem is, I don't know if any viable alternative. Private vaulting like the KWN guy appears to be selling solves nothing - if the government decides to change the rules, they know safe deposit boxes and private valut facilities are the first thing they should lock down. Offshore doesn't appear to offer much solution, either. We've already seen the whole country of Switzerland compromise its most strongly held values and long-standing banking traditions, caving under duress to the U.S. Gov't. I think it safe to assume that other jurisdictions can be pushed around just as easily when push comes to shove.

Erik

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earthwise wrote: Isn't it

earthwise wrote:

Isn't it possible that the client did have a list with serial numbers etc. and the bank sold their gold nonetheless? That would account for the outrage and incredulity noted.  In today's world, it would be just one more outrageous ripoff that gets swept under the rug.

No, I don't think so. In this case, the client would have said so. This would be embezzlement and would just end up in court, being well publicized. The bank would probably have to close down their custodial unit as a consequence. If I park my car in the supermarket's parking lot, and when I come back, the clerk tells me they had sold my car, but they could easily buy another one for me, I'd see them further.

The difference between allocated and unallocated is that with allocated, the customer owns the gold. With unallocated, the customer only has a claim against the bank.

I think Erik T made a comment early on in this thread that someone wanted allocated, but the banker (=salesperson) was only able to sell financial products and had to call his boss to figure out what the term 'allocated' meant. I think this anecdote gives you the right picture.

Victor

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allocated

Erik T,

MF Global was strictly speaking not allocated either. About a year (?) earlier the COMEX had introduced new 'electronic warehouse receipts' which, when you bothered to read the small print, weren't actual warehouse receipts. They just stated which bars you would be allocated by your broker if you would later request this, but they didn't confer title to the bars.

Again, everyone was duped into trusting the system by some changes to the fine print. This, I think, is how it usually happens. And this is why they eventually cannot complain in court. Because they read it and they signed it. Bad luck.

By the way, I am not sure confiscation should be your greatest worry (I would avoid ETFs though because according to their usual fine print, they can decide to wind down at a time at which I do not want this). The next major issue will be that the US dollar will one day no longer be accepted in international trade. Then everyone will need a liquid gold market. So even if some governments pass confiscation laws (you never know), I think this will be short lived.

Victor

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Thanks Victor

Victor,

Thanks for the clarification on MF Global. No surprise that the "story" circulating on the blogs was slightly out of sync with reality. But I still think that in all-out pandemonium, the government will do whatever it wants.

On a related note... Does anyone here know of any EVIDENCE showing that the Justice Dept. announced an investigation into JP Morgan's PM dealings?

Yes, I'm well aware that GATA and the rest of the gold bugs have made a big deal about this "investigation", but I have thus far not been able to confirm that it is real. Evidence that JP Morgan is the subject of an official investigation would be much appreciated if anyone has it. (Note: "GATA says so" doesn't constitute evidence!)

Erik

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@ErikT, Tycer, JimH, Earthwise

@Erik: "Thanks for the laugh, bbacq."  At least we make each other chuckle, and that is a good thing!  But you are mistaken if your takeaway is that I am not interesting in enlightening discussion.  I am simply not interested in appeal to authority as a mode of argument, especially when the authority appealed to is oneself, or the highly-discredited mainstream media.  "I wasn't commenting on your point; I was making my own point."  I realize that, Erik.  It is a common strategy.  A more productive approach in idea-tennis is not simply to serve and never return or volley, but to actually try to return the opponent's serve.  Idea-tennis consisting of nothing but aces is boring and unproductive.  I tried to address points you made, I apologize for digging at you (though you seem to enjoy sparring, as do I) but I am dead serious in getting as close to truth as we can know out to a large audience.  I will reiterate a point I made earlier: "The way you argue - broadbrushing swathes of society, appealing to the authority of coercive bozos - makes me think you have an agenda."

I will reiterate to you that the greatest utility of a site and thread like this is to help enlighten the public on just how messed up our current monetary/financial/governmental system is, and why, and what the alternatives are, and why those alternatives are superior.  Then people might be able to better plan their lives to deal with the uncertainty forced on them by this evil system, and to change it to something more in their interest.

@Tycer:  You are correct in calling me on ad-hominism.  Mea culpa and apologies to all.  It can be difficult to divorce oneself from the rhetoric-to-date.  This thread was founded in ad-hominem:  "charlatan"  etc...

bbacq: There is no "they" in "market" to understand things in the way I am using the term, Erik.  The market itself thinks, the market remembers, the market computes prices.  My neurons don't think, my brain does. 

Tycer: I still do not understand your meaning, please explain.

It's an incredibly important thing.  It underlies everything, everywhere.  Not many yet understand it, and we'll never understand it fully, because it would be like a neuron "understanding" how the brain works.  The brain operates at a complexity level one step up from neurons.  The brain might, if it studies and thinks long enough, "understand" the neuron, but the converse is impossible.  We will never know what the market knows.  We will never understand in anything but a very general way how it accomplishes its magic.

Tycer, the best way to start to get your had into this idea (I have long referred to it as "systemic rationality", others use other terms) in the field of economics and finance is to read the short monograph: "I, Pencil", by Leonard Read.  I raised this idea in response to a comment by ErikT that he didn't have confidence that individuals (neurons) in the market (brain) understood the finer points of our discussion.  My point is that that  is not necessary.  Those that don't understand will learn rapidly as the system changes state.  In complexity-speak, or chaos-speak, if you like, we are in the process of moving to a different strange attractor in financial state-space.  I could go on and on, but I recommend James Gleick's "Chaos", and anything by Nassim Nicholas Taleb, who understands the math and applies the lessons to economics and finance in a somewhat accessible way.  Mandelbrot knew this stuff a long time ago, but is less accessible.  There are summaries on the web.  I strongly recommend podcasts by Russ Roberts at this site, where he interviews Taleb and many others.  It is an absolutely great site to listen to, and you can make your own decisions about what they say.

One lesson from Thomas Kuhn's "Structure of Scientific Revolutions" is that just before society recognizes a new truth (eg helio-centricity after geocentricity, Einsteinian relativity after Newtonian mechanics, quantum theory after classical physics, and, I postulate, gold-currency after fiat) the side advocating the (lesser-correct) historical/conventional model is fully entrenched and most convinced of its position, even to the extent of ridiculing, ostracizing, and punishing advocates of the new (truer) world view.  But, because truth always finds a way, eventually the ideas closer to truth are generally and broadly adopted by society.  The market as a whole has always eventually rejected fiat currency and central banking because they do not promote truth in value.  It will happen again.  I so wish we would stop testing these failed theories, they have never worked, and can't.

[bbacq]: There was a time in history when most people didn't sit in Plato's cave watching Munger's, Gates', and Buffet's shadows dance, and instead went outside to see reality, and they didn't retreat back in fear.

Tycer: "Please enlighten me as to when that was."

To use your own word, I think the period of history known as "the enlightenment" was an era of exceptional reason, and the use of independent thought, and this enlightenment resulted in what is probably the best kick at the self-government can, the constitution of the United States of America.  The US expansion into the west was another time when people didn't fear truth, and confonted uncertainty head-on (apologies to indiginous North Americans - Canadian natives fared at least a bit better that those to the south).  I think that the latter part of the reign of Kublai-Khan is another such time.  There is very little independent thinking these days.  We have been trained in group-think.  I hope all reading this have read "Animal Farm" and "1984"...

Tycer: "I hope it can be. However it seems to me that with all our whiz-bang gizmos and such the human animal has not evolved in a positive manner is 5000 years or so. History may not repeat itself, but we sure seem to interact with each other the same."

Tycer, does not our interaction here and now, in clear view of anyone who cares to seek it out, constitute for you the perfect counter-example to your own proposition?  The human animal need not evolve for our behaviours to change, and behaviours have indeed changed dramatically in 5000 years.  We have never had the ability to interact as we now do.  We have never had the power to self-organize across geography, race, culture, societal status, the works.  The printing press, a relatively simple and evolutionary improvement on an existing technology, writing, caused massive disruption and huge power shifts away from the then all-powerful Catholic Church.  The internet has just got started!  Do you really argue that the internet, the web, the blogosphere, the webs of social networks - all of this - are not revolutionary, and will have little societal effect?  It is not a credible position.  Individuals are growing increasingly empowered, through nothing but knowledge of something much more closely approximating truth than what they are spoon-fed by "authorities".

Tycer: What is your definition of market-tests?.

In the context used, a run on a bank.  If a promissory-note issuing agency (such as a bank issuing gold-backed currency notes) starts to smell bad, and there are freely-available alternatives in the market, wealth will flow away from the skunky bank.  Individuals and other legal entities with savings will, feeling the risk of continuing to save in the [failing, fraudulent, imprudent, over-extended, opaque, whatever-reason] bank, will withdraw their deposits and move them to an institution in which they have more trust.  If the bank cannot survive under these conditions, ie is unable to call enough debt quickly enough to staunch the outflow of assets, it fails the market-test, is insolvent, and enters bankruptcy, defaulting at least partially to at least some proportion of its creditors.  The entire sovereign state of Greece has failed a market-test recently, and is paying nickels on the dollar on its debt notes.  A market-test and default in all eyes except those of some centralist bankers who had a vested interest in "managing" the Greek default, and who used MFGlobal (and their creditors) as sacrificial victims.  The entire Euro-zone is currently experiencing a market-test, which it will fail.

Specie-backed currencies, as you pointed out, have been manipulated in most if not all cases. It would be great if the current money masters would willingly give up their power to be replaced by your private competing minters in a non coercive system. My thought there is that currently, those that hold the most gold are the ones making the rules and will fight tooth and nail to keep it. My personal opinion is that their power is so great and their morals so low that modern society would not survive the war that brings that change. Even if enough people were ever to awaken and band together before communication was severed to attempt that change the others in the cave of Prussian education would surely kill them. At least we would finally find out if Yamashita's gold is fact or fiction.

Nathan Martin's opinions on gold backed currency make sense to me. Perhaps the longest running currency was completely fiat based and worked until specie-backed currency was forced on the populace. I'm referring to Tally Sticks. A benevolent master of all might be the most peaceable end even if we do get the short end of the sticks.

Thanks, Tycer, I'll go have a look at Nathan Martin.  There are lots of specie-backed examples, but the US wild west is an interesting one, I think.  I think it is the freeest money currency system we have ever experimented with.

Tycer, I encourage you to be optimistic.  The communications genie is out of the bottle.  

It is not necessary that "the current money masters would willingly give up their power":

They have no power that we do not willingly grant them. 

All we need is enough 12-year olds explaining the obvious, and they have no power whatsoever.  The only "power" they have is deceit, and now that we can all talk openly about this stuff, consult the guide of history, understand what math and science have to say about it, it is just a matter of time, and, I think it will be internet-time, not Roman-time in which the paradigm shift occurs.  It is for this reason that I advocate ErikT to stop trying to predict how things will behave within this foolish system, and instead focus on enlightening people on the ways in which it is broken, and how it can be fixed, to everyone's great benefit.

We no longer need to go to war to get enlightened.

A religious person would tell you, Tycer, that we already have a benevolent master and his name is God, or Allah, or Deva, or Brahman, say.  I have a slightly different view, but they map closely onto each other, I think.  Tycer the problem with humans as benevolent dictators is that we are both mortal (we die) and fallible.  What you propose is not sustainable, and tally-sticks were implemented by coercive central government/banking cartels that just happened to be the most powerful in the area at the time.  It would not be a step forward. More fiat is not the answer, because there are dramatically superior alternatives.

The only answer is to devolve the authority for the big and difficult decisions and problems to something bigger than any of us, ie all of us, acting in freedom without coercion.  This is a very important concept, and we fail to grasp it at our peril.

Tycer you mention gold, and its concentrated ownership in the hands of those "who make the rules".  Two points.  First, I am disappointed constantly in the perception of powerlessness amongst the electorate in our western democracies.  In Canada recently, we defeated some insane internet-surveillance legislation through nothing but people speaking their minds publicly.  The advocate of the bill Vic Toews has been thoroughly discredited, his career is probably over.  My son now tweets his every move to Vic, just in case Vic wants to know where he is and what he is doing, and he is not the only one ridiculing these guys who just don't get it.

Once it is the subject of broad, open ridicule, the end of a coercive authority is near.

The internet (the market, Gaia, God, whatever you want to call the collective will and wisdom of the people of this planet) is going to bite back very hard at attempts at "control".

Second, it may not matter who has the gold.  True, historically gold has been king, and silver queen, if you will.  I am sure the market had lots of good reasons for making this decision, and we could discuss and try and understand them.   But it is not necessary that gold be the specie backing all future currencies.  In fact, there may be very good reasons, many of them discussed on this very thread, that gold is no longer as suited as silver or some other specie. 

Just as they destroyed the value of the currency that was meant to be convertible to gold, the US dollar, they have now largely destroyed the money-value of gold.  Just look at all the wasted effort on this blog trying to understand "the price of gold" and where it might go, how much gold might actually exist, what the leverage ratios might be, etc.

We must have a decent idea of scarcity and ownership concentation/distribution of a specie for it to have value as money.  I think there may now be enough confusion about gold that its money-value is in decline (though still rising relative to fiat), because it is no longer so easy to have faith in gold's value, because of all the "how much is there?   Where is it?".  I am not so sure the same is true of silver.  Previous above-ground silver stocks are largely depleted, and I do not believe (anyone have data?) that silver ownership is as concentrated nor as sullied through leasing and leverage as gold.  I'd love to see data, because this is important.  But it is not impossible that we see silver-backed currency, as some currently propose for Mexico.

Tycer, thanks for the chance to chat and your warm welcome, and I'll check out that link.

@JimH:  I find your posts refreshing.  Eric Sprott deserves our praise.  He keeps his gold just down the street from me here in Ottawa, and conducts surprise-audits on the Canadian Mint, in whose vaults he keeps it.  I trust Eric much, much more than I trust our governments, who may, in the end, nationalize his efforts at bringing truth-in-value back to the markets.  We must all speak out before that happens, or suffer the consequence of our indolence and indifference.  Keep posting, you are closer to the truth than many...

@Earthwise: How lovely for you and ErikT that you are engaged in mutual admiration!  Do you have something constructive to add to the discussion other than offering up that it is better to trust others than one's own mind, and speciifcally, to trust ErikT?  I don't understand the "deepest bench" comment.  Is there a "home team" here or something?  If so, the newbie (me) would like to know!

@ Everyone Else: Please look at the problems more deeply than does Earthwise, and learn how easily are corrupted ideas like "price" and "value" and "money-supply" etc in a monetary system based on nothing but promises to ourselves that are taxed by others for their own benefit.  Read everything very, very carefully, and let no-one be the arbiter of your perception of truth other than yourself.

End central banking before central banking ends us.  Don't trust me, just look into the facts.

best regards,

bbacq

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bbacq
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@ErikT: My apology and further discussion

I hope you accept my apology above in the spirit offered.

You wrote: 

My point is, in the extreme circumstance that allocated accounts are designed to hedge for, I think all bets could be off and the rule of law could easily be suspended.

Problem is, I don't know if any viable alternative. Private vaulting like the KWN guy appears to be selling solves nothing - if the government decides to change the rules, they know safe deposit boxes and private valut facilities are the first thing they should lock down.

I think it is useful that this discussion has progressed to recognizing that the rule of law has broken down.  MFGlobal and other financial atrocities should make it clear to everyone that something like nationalization of private assets is not that far away unless we act to stop it, by ridiculing and removing from positions of authority those who do not serve the public interest.

But I must suggest that the obvious viable alternative is to invest in ABCD: Anything Bernanke Can't Destroy.  I didn't come up with the acronym, but it is remarkably apt.

I'll offer up again to discuss whether conventional deflation and consequent asset-price reductions (as measured in fiat) is even possible when it so obvious to so many that such a scenario under the current situation of derivatives-to-the-moon will also likely bring down the currencies themselves, in which these prices are quoted.  Victor-the-cleaner and I were able, elsewhere, to at least reach the point at which we largely understood which points were in dispute.  It can be exhausting unless one stays quite focussed, but it is useful for the public audience.

best regards,

bbacq

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darbikrash
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?

I’d like to direct a question at the brain trust on this thread in the hopes that I may finally get an answer to a question that has bothered me for quite some time.

Simply put, if one is to accept the notion that we have in fact a credit based economy, with only a small, token, fiat component, (as Steve Keen suggests here) than exactly how does a gold standard provide any advantage whatsoever?

To continue, the thesis around endogenous money creation fundamentally disagrees with the widely held belief on how money (debt) is created, and represents that this is a demand driven system that simply responds to debtor requests for loans, and backfills these requests (after the fact) with capital reserves, fiat or otherwise. Further, Minsky’s instability hypothesis suggests that a dominant failure mode in such a credit based economy is speculative and Ponzi based lending, all of which we can readily observe.

And from here we of course have the system of credit default swaps, estimated by some to be in the vicinity of $600+ trillion, which are really more akin to insurance policies than monetary instruments, overhanging the substantially credit based economy.

So, how, exactly does a gold standard provide any relief to this system, what would change specific to these subjects if we had a gold standard, and how would it change?


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@darbikrash

In responding I don't mean to lay claim to being of the braintrust here.

Simply put, if one is to accept the notion that we have in fact a credit based economy, with only a small, token, fiat component, (as Steve Keen suggests here) than exactly how does a gold standard provide any advantage whatsoever?

Keen isn't talking about gold standards in that article, he is talking of "free banking" issuing fiat currency.  You'd have to quote specific text to allow better understanding of your intent.  I don't like being forced to accept our current fiat scheme, and uncapitalized "free banking" doesn't sound like a very good idea either.

To continue, the thesis around endogenous money creation fundamentally disagrees with the widely held belief on how money (debt) is created, and represents that this is a demand driven system that simply responds to debtor requests for loans, and backfills these requests (after the fact) with capital reserves, fiat or otherwise. Further, Minsky’s instability hypothesis suggests that a dominant failure mode in such a credit based economy is speculative and Ponzi based lending, all of which we can readily observe.

Yes.  Endogenous money creation (and destruction) by the market seems to be the dominant mode for creating additional money beyond fractional-backed specie in those models as well as for fiat currencies.  Yes, some sort of disincentive to excess is required for the system to remain stable.  We have observed excess and failure where we have created legislation that removes disincentive to fraud and imprudence in lending and money creation.  With legislation that ensures consequence to imprudence under the rule of law, money supply and demand are met in a similar fashion as for any other good.

And from here we of course have the system of credit default swaps, estimated by some to be in the vicinity of $600+ trillion, which are really more akin to insurance policies than monetary instruments, overhanging the substantially credit based economy.

Yes.  It is a Ponzi scheme of unprecedented scope and scale, the first global Ponzi scheme, in fact.  Hurray for globalization, eh?  And all the insurers are insuring themselves in a giant distributed feedback loop.  And the system is inherently unstable and uncontrollable.  Scary, kids.

So, how, exactly does a gold standard provide any relief to this system, what would change specific to these subjects if we had a gold standard, and how would it change?

Well, a gold standard would replace this system.  This system wouldn't exist.  A system that could work reasonably well, and much better than our current system is one in which:

- any country wishing seriously to engage in global trade moves to a specie-backed currency, specie of their choice.

- ideally, every country implements decentralized private banking as below, but if central, so be it, they will just lose in global trade and thus punish their own citizens.   I feel for them.

- international trade, ultimately, is settled in specie, at the currency-possessors discretion.  Of course, banks may choose to retain their trading partners' currencies instead of specie at their discretion.  But all notes are callable and convertible into specie, else inernational trade law has been violated.

- the countries that are smart will not use central+fractional banking, which will continue to impoverish their populations, but instead move to competing highly-regulated, highly-transparent banks that are empowered to take deposits, make loans, and issue the national currency, under their own name.  While all notes are nominally freely exchangable for specie, any bank that tries to make too many loans or print too many bills, beyond that required by their share of the endogenous money-creation demand will suffer note depreciation relative to its rivals, and either be driven out of business by a run, or assemble their feces and re-instill confidence in their prudent management of their creditors' deposits.  The multi-currency software out there might not even need to change at all.

- sufficient competition must be ensured, ie lots of issuers, and limits on absolute balance-sheet size, regional dominance, or overall money-creation position limits might be required.  I would certainly start with them.  Too big to fail is too big to exist, and it should be stopped before it gets that bad.

- I think it would probably be a good thing if banking regulation precluded limited liability in the sector, ie that bank directors and shareholders be held fully liable for the banks' balance sheets.  Banking should be boring, so that the (productive) rest of us can forget about it again and get on with our lives.

The system as proposed does away with the objections you mention.  Disincentive to imprudent lending and excesive note creation exists intra-country for those who choose this path, and their economies will thrive, all else equal, and provide a market-based disincentive to those countries that choose either not to play, and continue with fiat (which will devalue relative to the other currencies), or to play, but using a central bank, which will then prolong the excessive government borrowing, taxation-through-inflation, etc, and they too will devalue.

I agree the current system is an absolute Ponzi scheme, and we all need to move the discussion to the simple replacements that exist, are not hard to implement, and will be a lot better in the long run. 

I can't see the situation resolving any other way than a return to specie-backing in order to restore faith in international trade and currency markets (or war).  It might take a long time, and we have to endure a lot of pain, or we can rip off the bandaid and expose the wound to the fresh air to heal. 

The first countries to make this move will have a huge head start.  Ooops?  Did I hear a starting pistol come echoing around the globe from the far east just now?

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bbacq wrote:I hope you

bbacq wrote:

I hope you accept my apology above in the spirit offered.

Hi bbacq,

Apology accepted, but for the record, I never thought one was necessary. Your passion for the subject matter at hand did, in fact, briefly start to lead you down the path of ad hominemism.  I've done the same thing myself on several occasions. As the pot, I won't take issue with the kettle on that score.

The reason I think we are "talking past each other" is that we have different interests (objectives?) that bring each of us to participate in these forums. You seem to be very aware of the shortcomings of fiat currency and the risks they pose to society. I couldn't possibly agree more. Believe me, you're preaching to the choir with almost all of what you write. Your agenda seems to be to express your views in hopes of "waking up" the masses to the shortcomings of fiat. I can relate to that, too. I spent several years doing exactly that, and I relate to both your passion for the subject and your frustration with the masses for "not getting it".

But to be honest, I've lost interest in personally volunteering my time and energy to serve as a sound money evangelist. I've spent a lot of emotional energy on that agenda over the last 5 years, and it's been a very un-rewarding experience. The vast majority of the populus still don't get it, and show few signs of wanting to. So now I focus my energy on trying to figure out what actually WILL happen, as opposed to what SHOULD happen if I were in charge.

bbacq, please rest assured that I agree with much of what you've said about what should happen, and why a commodity-backed currency would be better than fiat. I get it. Honest, I do. I'm just not interested in further discussing the subject - that's all. I've resigned myself to accept the unfortunate reality that we are a long way from society at large recognizing these things, and I choose to focus my mental energy trying to figure out what is going to happen next, as opposed to evangelizing what I think should happen next. And unfortunately, I stand by my comments a few posts back: Sadly, we're a long way from moving back to sound currency, and I remain convinced that the most powerful people in the world have a very strong personal incentive to preserve the fiat system, which is the source of much of their power.

All the best, and welcome to the site.

Erik

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darbikrash wrote: Simply

darbikrash wrote:

Simply put, if one is to accept the notion that we have in fact a credit based economy, with only a small, token, fiat component, (as Steve Keen suggests here) than exactly how does a gold standard provide any advantage whatsoever?

The fallacy of your statement is that there is "only a small, token, fiat component". The entire system is fiat, and the credit system that makes up most of the economy is denominated in fiat currency. This means that debt can be inflated away by debasing the unit of account (fiat currency).

The primary purpose of a gold standard is to limit the quantity of money. In the case of actual currency, there has to be gold to back it, so unless and until you can mine more gold, you can't expand the money supply. In the case of credit, you still have the ability to create credit out of thin air, but to whatever extent you have a reserve ratio requirement, the need to back the system with a reserve of gold-backed money means that the growth of the credit system is proportionally limited.

Of course, this opens the door for those who believe in central planning to manipulate the economy by adjusting reserve ratios, and to that extent, there is good reason to observe that a gold standard doesn't really "solve everything", although it would be a start.

But honestly, I think all this discussion is academic. The whole "Gold Standard Debate" is predicated entirely on the belief held by some people - myself included - that government being able to arbitrarily regulate the money supply is not a good thing. We need to face up to reality here, folks. If anything, the trend right now is more toward collectivism and "the Power of Government". Most people hold the belief that Governments needs and should have the ability to manage the money supply. That's why Krugman has a nobel prize and most people never even heard of Von Mises.

I'm sure bbacq can provide us with 2,000+ words elaborating on why this sucks. But the simple, short, bottom line here is that most people think government controlling the quantity of money arbitrarily is a good thing.

Erik

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bbacq: What got your panties in a twist?

bbacq wrote:

@Earthwise: How lovely for you and ErikT that you are engaged in mutual admiration!  Do you have something constructive to add to the discussion other than offering up that it is better to trust others than one's own mind, and speciifcally, to trust ErikT?  I don't understand the "deepest bench" comment.  Is there a "home team" here or something?  If so, the newbie (me) would like to know!


bbacq

bbacq,

There is no mutual admiration as I have yet to do anything that would warrant Erik's admiration. But neither have I warranted your scorn that borders on the obnoxious. I can only surmise that it comes from a sensitivity caused by your misperception of partisanship on my part into a previous digital altercation between you and Erik. Gee whiz, that must have really hurt your feelings. 

I never  "offer(ed) up that it is better to trust others than one's own mind" so please don't try to put words in my mouth (or in my posts or whatever), but now that you mention it, how does one go about trusting one's own mind if one doesn't bother to inform it? This is what I was trying to express, my gratitude to everyone (especially Erik) for providing valuable infomation from a broad perspective, free from the taint of personal gain, so that I may go about trusting my own mind based on sound information from a variety of trustworthy perspectives. That gratitude also included you, but in light of your rudeness it is hereby withdrawn. Dude, I'm a blue collar guy, working in a construction industry, with three young children, a small farm and a million preps underway. I don't have time to study the finer points of things economic. So therefore I am deeply indebted to those that freely share their expertise. So, no I don't have anything constructive to say. I have an IQ two points above crash test dummy. Sorry; that's my lot in life. All I have to offer is thanks to those who deserve it. If that's not enough for you, then ignore me.

The deepest bench comment, likewise, was a hat tip to the valuable (to me) contributers here. If you look at other similar sites, after the marquee figures (Turd, Puplava, Quinn, Sinclair, King etc.) those who comment there (The Bench, if you will) aren't nearly as enlightening as the "heavy hitters" (oops, there I go again with the baseball analogies. Sorry.)  that show up here. The lively debate by knowledgable people is very rewarding and helpful to those less knowledgable. That is, however, when it's not laced with condescension and sarcasm.

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Meanwhile, the gold market is tanking... No manipulation req'd!

The gold chart sure isn't looking pretty. When I commented on the major (since 2008) trendline being violated, I said I expected a re-test of 1640 - 1650 (where the line is now). We got 1600, then it turned south again. Selling off pretty hard now in the overnight session (daytime here in Asia).

Again, I'm not a TA guru, but IMHO if we decisively penetrate the 1525 lows of the last several moves, the next downside targets are in the 1300s. QE3 would change everything, but unless and until we get it, I don't think the gold picture looks good at all.

Best,

Erik

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Fallacy? Sound Money is the Fallacy

Erik T. wrote:

darbikrash wrote:

Simply put, if one is to accept the notion that we have in fact a credit based economy, with only a small, token, fiat component, (as Steve Keen suggests here) than exactly how does a gold standard provide any advantage whatsoever?

The fallacy of your statement is that there is "only a small, token, fiat component". The entire system is fiat, and the credit system that makes up most of the economy is denominated in fiat currency. This means that debt can be inflated away by debasing the unit of account (fiat currency).

The primary purpose of a gold standard is to limit the quantity of money....

Fallacy? The amount of of credit-money (money backed by debt) created in the banking system absolutely dwarfs the fiat-money issued by the central bank. 

A gold standard does nothing to limit credit-money expansion in the banking system, or the "roaring '20s" would have never occured. 

The only reason that the goldbug herd wants a gold-standard, is because they think it will make them rich (or richer). I find that extremely naive, unless you are a banker. History has proven that "sound money" is a fairy tale.

Jeff

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Erik T.
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Yes, JAG, fallacy... Oh, BTW, Gold is crashing too...

@Myself, two posts, a few hours, and $30/oz ago:

Looks like I was right - still not all the way to 1525 (critical level) yet, but down to 1540 now and headed south fast.

@JAG

The point was that the debt is denominated in fiat. With a gold standard, you can't inflate away the debt by printing more money, unless you can find more gold. I stand by the statement.

As to the fact that credit can still be expanded in the banking system unless reserve ratio requirements call for at least some gold to be in the picture, you are correct about that, but I had already acknowledged that point in my post. I stand by my prior statements.

Best,

Erik

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Gold

A few more comments on gold from McAlvany today. Click where it says "Audio MP3" to listen. Listen starting at 18 minutes into this.

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More detail on the Greyerz allocated customer...

Today from Embry, on KWNews;

"Embry also added: “It was an interesting interview with Egon von Greyerz that you had on KWN in the last couple of days.  I know him quite well and I can tell you I have the highest regard for him.  He was talking about the man that went to his Swiss bank to get his allocated gold out, and they couldn’t give him the gold because the bank didn’t have it.

What he didn’t mention in his interview is that when the customer finally got his gold, it was 2011 minted bars.  This made no sense because he had been holding the allocated gold for years.  That’s just another example that even the allocated gold in the banking system has probably been loaned out.  Many of these customers will wake up one day and realize they entrusted their gold to the wrong people.”

link:  http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/23_Jo...

Victor had thought maybe this customer had been sold something that was not allocated Gold... but this more detailed accounting would suggest that this was indeed an indication that allocated Gold was not so... umm... allocated. 

To Jag, why not let "the Maestro" himself explain how a Gold Std. is supposed to work, and the benefits it purports to afford;

link:  http://www.constitution.org/mon/greenspan_gold.htm

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

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JimH: Not only that.............

Jim,

Very prescient words from "The Maestro". I would add to that the words of Charles DeGaulle that was posted on The Burning Platform today.  http://www.theburningplatform.com/?p=34937

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'The Maestro' ...

Branden's 'My Years with Ayn Rand' provides insight into her inner circle including the younger Greenspan who clearly lost his way with age ... I believe these 'banksters' likely end up in jail Milliken-style once the dust settles on this historic moment.

Having fun figuring out how best to navigate wealth through this 'moment' and this thread has enhanced my thinking - thx...

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@ErikT, Earthwise

@ErikT:  What a gracious and informative acceptance of my (unnecessary?) apology.  Thank you.  I begin to understand "your agenda" better.  I don't know how familiar you are with quantum physics, chaos and complexity theory.  Just in case you have not weighed these in your decision to abandon promoting the case for sound money in favour of predicting the operation of a financial system based on unsound money, I will offer up that you cannot escape. 

Promoting truth, ie a sound money system, will lead to a change of outcome within the existing unsound money system: it might end sooner, for example.  Predicting outcomes (whose truth cannot be established until later) within this system will similary have an effect on the system's longevity and behaviour.  If we even attempt to predict within it, we may well be extending its life.  That certainly appears to be the result to date, I feel.  It is time to leave the box.

It is because I understand this meta-truth that I am frustrated with those who understand the truth, yet shrink back from promoting it.  I hope you will reconsider, Erik, and try to rebuild in yourself the faith required to continue to advocate sound money, perhaps in addition to attempting the impossible, ie to predict the operation of this crazy system.  It perhaps seems counter-intuitive to you, but it is quite likely that it is easier to influence this system away from fiat insanity than to predict outcomes while fiat insanity reigns.  Once money is stable again, predictability (in the small) will return.  The mathematics of chaos and complexity theory tells us so.

Maybe you could throw a bone to your old passion, Erik, and sign off every post with "End central banking before it ends you" or suchlike.  All it takes is an edit of a .signature file, and it would help others to understand where you are really coming from.

@Earthwise:  I believe I may owe you an apology as well, Earthwise, and am delighted to offer it up.  I very much doubt your self-effacing comments.  You have the intelligence to recognize aspersions cast, and to leap to your own defense, which requires both pluck and courage. "Intelligence" can be measured many ways.  Please read with a critical eye, all is not as it seems.  You may find it incredible, beyond belief, but there are people who accept payment for promoting falsehoods and fomenting discord on sites such as this.  I stand by my words to you that we must all weigh what we read carefully, and not blindly accept what any one mind writes.  I hope you continue to read my words and that mine might be one of those minds that informs yours.  Peace.

I do grow frustrated with in-the-box thinking.  It is in-the-box thinking that has led us to here, and it will not get us out.

This fiat system will end, and it will end when enough people understand the truth about it.

The manner in which it will end cannot be predicted.  The timing of its demise is similarly uncertain.

It will end sooner if we focus on ending it, as opposed to predicting its behaviour, which is impossible.

The act of prediction within the system changes its behaviour, and its lifecycle.  We create when we predict. 

To bring us back to the topic of the thread, I am delighted that organizations like GATA exist, that Harvey lives, breathes and publishes his views, and that I can read them on the 'net and choose to believe them or not, and that Eric Sprott is here in Canada promoting sound money, and that others spread the word on the monetary importance of gold and silver.  I was drawn here because I saw such individuals being slagged and referred to as charlatans and such, mistruths were rampant, and the deceit of this current system and the profound negative effect it has had on us all were not getting airtime here, and it irked me.

My patience for lack of clarity on this topic wears thin, because, I believe, polarization around Bastiat's dichotomy is occuring:

Bastiat: "All legitimate interests are in harmony".  If you agree you trust freedom.  If you disagree you trust a police state.

There is no middle ground.  There is a battle between good and evil raging, and one is on one side or the other.  Passivity currently places one on the wrong side of Bastiat's dichotomy, and ideological activism is now required to be good.

What a strange world we have allowed them to create for us... changing it is quite possible.  Effective prediction within it is not.  We will eventually learn this.  I want it to be sooner, not later, that my children might live in peace.

Best regards and thanks (seriously!) for your responses.

bbacq

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bbacq
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@ErikT: Can you still edit your first comment?

When you go back and read your words there, are you proud of them?  Are there any you would change now?

Can you, on re-reading your words, and understanding my position better, understand why someone of my beliefs would become adversarial here, based on what you had written?

Just a thought.  Your words are the first to appear under the article that launched this thread, Erik.

Voltaire: "How infinitessimal is the importance of anything I do.  How infinitely important it is that I do it."

bbacq

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Lucky dog

bbacq wrote:

@Earthwise:  I believe I may owe you an apology as well, Earthwise, and am delighted to offer it up.  I very much doubt your self-effacing comments.  You have the intelligence to recognize aspersions cast, and to leap to your own defense, which requires both pluck and courage. "Intelligence" can be measured many ways.  Please read with a critical eye, all is not as it seems.  You may find it incredible, beyond belief, but there are people who accept payment for promoting falsehoods and fomenting discord on sites such as this.  I stand by my words to you that we must all weigh what we read carefully, and not blindly accept what any one mind writes.  I hope you continue to read my words and that mine might be one of those minds that informs yours.  Peace.

bbacq,

I accept your apology and have now cancelled my midnight plans to put a voodoo hex on your dog. (I couldn't do that to a person no matter how pissed off). And I do read with a critical eye, and then play one opinion against another and see what shakes out. But it all starts with good input. I will now reconsider including yours in my analysis.

Peace back atcha.

P.S. Nothing is beyond belief concerning what people will do for money.

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Fiat or Alfa

Erik T. wrote:

The fallacy of your statement is that there is "only a small, token, fiat component". The entire system is fiat, and the credit system that makes up most of the economy is denominated in fiat currency. This means that debt can be inflated away by debasing the unit of account (fiat currency).

The primary purpose of a gold standard is to limit the quantity of money. In the case of actual currency, there has to be gold to back it, so unless and until you can mine more gold, you can't expand the money supply. In the case of credit, you still have the ability to create credit out of thin air, but to whatever extent you have a reserve ratio requirement, the need to back the system with a reserve of gold-backed money means that the growth of the credit system is proportionally limited.

Erik

Thanks to Erik T and bbacq for the detailed responses. 

For me this raises more questions, namely it begins to come through that the goal of “sound money” does not necessarily accommodate the organic needs of the (always) growing economy. While mapping the quantity of money to the rate at which one can dig a mineral out of the ground may have the immediate effect on increasing the quality and stability on-going businesses through an enforced scarcity of capital, it will have the result of decreasing the quantity of new businesses, and may impede access to capital for existing ones as well. I suppose the theory is that this is a good thing, as it would tend to decrease abuses if there were constant competition for the best use of (artificially) limited capital.

But unless this resultant supply velocity maps in some meaningful way (highly unlikely) to the normal needs of a capitalist economy by on-going (as well as new) ventures then catastrophe will ensue. A steady supply of new business and growth of existing business is always required to accommodate the steady influx of newly minted job seekers, and others that for various reasons are entering the job market all of which require the ability, mostly through labor markets provided by existing businesses, to sell their labor power in order to survive.

Insufficient businesses equals massive unemployment and a catastrophic death spiral.

So any monetary theory, or even a simple means of modulating currency (or credit) supply, must be mindful of these basic functional requirements, which in fact supersede any “sound money” solution. If the creation of money or credit cannot keep pace with the organic needs (neither too fast nor too slow) of the economy, it is not a solution at all.

But endogenous money theory says this is a moot point, the government does not create the money supply, the demand/consumer side does. And in certain instances, this is inherently non-inflationary no matter how much credit is created- as long as the credit obtained is used for productive purposes, and not speculative or Ponzi purposes. Because of this, I don’t really think it is accurate to label this a fiat credit system, the “decree” component is not by a government, it is a self fulfilling form of a banking/borrower supply chain- even if it is settled using fiat currency.

So if you buy this frame of reference, than the key is not trying to modulate the economy with how fast a mineral is extracted from a hole in be ground, but how and to what purpose is the vast amount of credit that is being extended used.

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Erik T.
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bbacq

@bbacq

I'm glad you're still participating in this thread, and have taken a more friendly tone toward others here.

To your question, if I had it to do over again, I definitely would not have used the word "charlatan" in my first and early posts in this thread, because it seems to have caused many people to read meaning I never intended into my statements.

But I stand by my primary contention, which is that GATA, Ted Butler, Harvey Organ, and several others do the investment community an enourmous dis-service. A careful review of their viewpoints and central arguments reveals, quite simply, that they don't know what they are talking about. While they may mean well, the simple truth is that they represent themselves to their readers as experts in these markets, when in reality they posess what strikes me as, at best, a novice level of comprehension of how the markets function.

I regret that for a while, I had fallen into Jeff Christian's mindset, i.e. that the only possible explanation for how people who have been around these markets for 30 years could possibly say such ignorant things must be that they are being intentionally deceptive and disingenuous.

After much reflection, I am now convinced that these are good, well meaning people who sincerely want to fight the rampant corruption we all know does in fact exist in financial markets, and they are doing their own personal best in persuit of those goals. Unfortunately, their efforts are counter-productive, because they are quick to jump to errant conclusions based on their faulty understanding of the markets. The glaring errors they make (price discovery, physical to paper being a matter of leverage, etc) evidence that these people not only are not experts, but that they fail to recognize the limits of their own knowledge.

Look, I like being a hero too, and I would love to receive accolades of thousands by coming into a poor village and saving the lives of children by performing emergency, life-saving surgery on them. Problem is, I'm not a surgeon, and am not qualified to do surgery on anyone. I would be causing more risk and harm by trying, so I know better than to show up with a scalpel. The people I've labeled as charlatans know less about precious metals markets than I know about surgery, and that fact is obvious to anyone who does their homework.

I would definitely have chosen different WORDS to make my point in the first post, but the bottom line remains the same in my mind: These people are bad news for the investment community, and we would be far better off without them. To me it is shocking and disappointing as hell to see otherwise brilliant people like Chris Martenson and Eric Sprott falling for their misinformed, logically incoherent arguments hook, line and sinker.

I've answerd your question because you posed it very politely, bbacq, which was a welcome change from a few posts back. But please respect that I have no further interest in arguing this point. I've made my case in dozens and dozens of posts in this thread already, and really don't have much more to say. Those people here who have read and considered my arguments throughout this thread and still feel inclined to take GATA, Harvey, and Ted seriously are people I simply cannot help. I'm sorry, but I've tried and have run out of energy to continue this much farther. I would certainly welcome SUBSTANTIVE discussion - like someone explaining what the paper to physical ratio has to do with leverage, for example. But in my perception, this thread has now reached the point where some people are just stuck on "I like listening to these people regardless of whether most of what they say can easily be disproven as nonsense or not". Hey man, diff'rent strokes for diff'rent folks.

All the best,

Erik

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@darbikrash: don't forget the market, and prices...

the goal of “sound money” does not necessarily accommodate the organic needs of the (always) growing economy.

I want to go bacq to basics, and start again there and we can see where we diverge.  I quote myself from elsewhere:

1) Money is just an idea, not a thing itself.  It is the idea that there is something in the middle of all goods' values to which everything can be compared that assists in reducing the complexity of the relative-value problem: "is A worth more than B?  What about C through Z and all their relative values?". 

2) The money-quality of a good is not a binary quality, like "alive/dead".  Goods have varying degrees of money-quality.  The goods that have the highest degrees of money-quality are those we refer to as currencies, and use in our transactions and savings.

3) The market decides on the degree of money-quality of a good, and thus its utility as currency, amongst other potential uses for the good.  It can change its mind.

4) The market values consistency of value in transactions across time and space and scale in its determination of money-quality. 

5) Consistency of value of a good as currency derives from other properties like supply limitation, durability, portability, universal acceptance, divisibility, broad range of utility, etc.  These support the money-functions of store of value, medium for trade, unit of account.

6) The market picked precious metals as currency in an evolutionary process over thousands of years because they brought consistency of value, ie truth, to the markets.

7) The value of a currency can go up and down, based on supply and demand, just like other goods.  But when currency goes up in value, say because of limited supply, or increased demand, prices as measured in currency drop.  If currency is valued highly, it doesn't take as much of it to buy something.

In a sound specie-backed competitive fractional-banking money system, there exists two goods, specie, say gold or silver, and paper representing specie, that both circulate as currency, representing as best they can the idea of money.  To the extent that the banks can be trusted to perform their promised function of convertibility, notes will circulate at par to specie and for good reason.  Notes are more convenient, notes can be digitized and sent for almost zero cost across oceans, digital notes can be endlessly divided to create smaller currency units, etc.

By "circulate at par" I mean that the prices of goods in specie and in issued notes are identical.  A note is exchangable into and thus represents a fixed quantity of a given quality of specie in the system I descrbe.

We must ask if the supply of currency matters much, or not.  We must consider carefully point 4 above.  I think you have concerns about scaling effects as the economy grows.  The scenario you describe is not unlike that of Canada under the Governorship of Jacques de Muelles.  Unable to pay his soldiers because of a lack of currency, and facing a consequent decline in economic activity, de Meulles, Intendant of Justice, Police, and Finance in New France came up with an ingenious idea.  His original (translated) words in his letter to his French masters of Sept 24, 1685:

“I have found myself this year in great straits with
regard to the subsistence of the soldiers. You did not
provide for funds, my Lord, until January last. I have,
notwithstanding, kept them in provisions until
September, which makes eight full months. I have
drawn upon my own funds and from those of my
friends, all I have been able to get, but at last finding
them without means to render me further assistance,
and not knowing to what Saint to say my vows,
money being extremely scarce, having distributed
considerable sums on every side for the pay of the
soldiers, it occurred to me to issue, instead of money,
notes on cards, which I have cut in quarters . . .
I have issued an ordinance by which I have obliged
all the inhabitants to receive this money in payments,
and to give it circulation, at the same time pledging
myself, in my own name, to redeem the said notes.”

The currency available to de Muelles was gold and silver coins.  In de Muelles' case, as the supply of money stayed constant or perhaps declined, yet the demand of trade increased, it was not possible for prices to move (down, ie for the money supply/demand imbalance to be corrected through a value adjustment, money becoming more valued) to accommodate the new ratios required.  He needed more supply, because he had debts he couldn't pay out of the local economy.  If he were a business running at a profit out of the local economy, and his currency was divisible, no such problem would have arisen, prices just would have dropped.   The reason pirates go on so about pieces of eight is that back then, they had to physically chop coins up to make change.  Limited divisibility of coin-based currency helped to create the money-supply shortage de Muelles suffered.  But if we make our sound specie-backed currency inifinitely divisible, a simple thing with modern digital systems, supply is not a problem, as money supply/demand variation is accomodated through price level changes.  The market is a marvellously smart beast and can deal with that kind of thing.  It doesn't (much) matter to the market whether money supply increases or prices drop in order to deal with economic progress.  Both work.  We have been taught to think that falling prices mean regress.  Rather, they reflect progress.

In a productive and growing economy operating in a sound-money regime, prices fall, and this is a good thing.  The reduction in the pricing of goods is a result of the improved efficiency of the more specialized evolved economy.  We have been conditioned in Plato's cave to think that economic progress induces inflation, and increased prices.  Not necessarily true.

While mapping the quantity of money to the rate at which one can dig a mineral out of the ground may have the immediate effect on increasing the quality and stability on-going businesses through an enforced scarcity of capital, it will have the result of decreasing the quantity of new businesses, and may impede access to capital for existing ones as well. I suppose the theory is that this is a good thing, as it would tend to decrease abuses if there were constant competition for the best use of (artificially) limited capital.

I am not sure who suggests money-creation rates will map to mining.  Long term, I suppose that would be true, and a fine thing, and it limits nothing, provided the currency is divisible and satisfies requirement 4 with respect to scale.  But shorter-term, if fractional-reserve is allowed, currency-issue in excess of specie will also likely occur.  If the economy demands it, and the banks feel it is prudent, and depositors have confidence in their bankers, loans will be made and the money supply will expand, and prices may even go up.  There is nothing artificial about the capital limitation.  The only limit imposed is how much faith depositors place in their bankers and their loans, which is the right and natural limit.  Exceed it, Mr Banker, and you face a run.   

But unless this resultant supply velocity maps in some meaningful way (highly unlikely) to the normal needs of a capitalist economy by on-going (as well as new) ventures then catastrophe will ensue. A steady supply of new business and growth of existing business is always required to accommodate the steady influx of newly minted job seekers, and others that for various reasons are entering the job market all of which require the ability, mostly through labor markets provided by existing businesses, to sell their labor power in order to survive.

Insufficient businesses equals massive unemployment and a catastrophic death spiral.

Can you understand, given what I write above, why I would consider this nonsense?  Through lots of our history we have done just fine with price adjustments accomodating us instead of money supply variations.  With bits, it is even easier.  Just shift a decimal place.  No spiral.

If the creation of money or credit cannot keep pace with the organic needs (neither too fast nor too slow) of the economy, it is not a solution at all.

I'm not sure I need go on.  Money supply doesn't have to change, money demand can drive up money value at constant supply, and thus drive down prices instead.  The market copes with this issue for us.  Remember we have lived in a cave of exclusively fiat for a long time, and we might need to think carefully, outside of the current paradigm, to truly understand economics, theories of price and value, etc.

Because of this, I don’t really think it is accurate to label this a fiat credit system, the “decree” component is not by a government.

Here you are wrong, we use our failiing fiat currencies because of government decree alone.  "Legal tender" means someone who gives me paper for my pig is protected by law from recourse.  I can't sue him for something better than legal tender.  I must pay my taxes in legal tender or I go to jail.  It is certain that we tolerate fiat only because of government edict and coercion and no other reason.   You conflate the effects of fractional reserve banking with fiat currency in what you write.  They are separate things.

So if you buy this frame of reference, than the key is not trying to modulate the economy with how fast a mineral is extracted from a hole in be ground, but how and to what purpose is the vast amount of credit that is being extended used.

I will be candid.  I don't buy the frame, no one should be trying to modulate the economy at all, other than by their own productive work, talk of holes in the ground makes me suspicious of your agenda, and credit is still extended under sound specie-backed money, and it is extended and the money supply expanded beyond the quantity of specie to the exact extent of the inverse of the fractional reserve ratio, dynamically, in response to market demand, with approproate feedback mechanisms to ensure prudence, by the banks, if fractional reserve banking is present.

What's not to like?

I find it interesting to discuss money with people who don't like gold or think it has much value.  My sister asked me "Why gold?"  to which, of course, the natural response was, giving we were sitting in the shade of a highly evolved life form, a tree, I asked back: "Why tree?"

It is the same question.  The answer is the same.  Um, just because?

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bbacq
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@Earthwise

It is after midnight, my dog is fine, so you must have kept your word.  Trust but verify.  

Your karma-score would have taken a serious hit had the hex happened.  My dog is a serious sweetie.

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