Sep 30, 2007

Antal Fekete: Can We Have Inflation And Deflation All At The Same Time

Can We Have Inflation And Deflation All At The Same Time
by Antal E. Fekete

Antal E. Fekete
Gold Standard University Live

Executive Summary

Very few people understand the "continental drift" that threatens with a fracture of the U.S. (and hence, the world) monetary system. There are two tectonic plates: one, the supply of Federal Reserve notes (FR notes), and the other, the supply of electronic dollars in the form of an inverted pyramid that rests on the supply of FR deposits. The fault line between the two tectonic plates, like San Andreas fault in California, is a worrisome source of unpredictable earthquakes that could cause massive and permanent damage to the U.S. and world economy.

The monetary fault line exists because of the different statutory requirements the Federal Reserve has to meet in order to increase the supply of "high-powered money":
  1. FR notes must be collateralized by gold or by U.S. Treasury bills and Federal Agency securities. The Federal Reserve does not print FR notes (still less can it air drop them); it gets them from a government official called Federal Reserve Agent against pledging appropriate collateral.
  2. FR deposits may simply be collateralized by the note of the borrower who borrows from any of the FR banks. Thus the Federal Reserve can increase FR deposits on its own authority, without reference to the government. The banking system then builds its own pyramid of deposits upon the fractional reserve of FR deposits

Thus there is a serious obstacle in the way of increasing the money supply by increasing the volume of FR notes in circulation, giving the lie to Chairman Ben Bernanke's promise to air drop them from helicopters. The obstacle: falling interest rates. For example, if the T-bill rate dips into negative territory, then the market value of T-bills exceeds their face value and the Federal Reserve "cannot afford" to buy them in the open market. The shortage of eligible collateral will restrict the inflation of FR notes in circulation. By contrast, FR deposits can be created out of the thin air in unlimited quantities at the click of the mouse.

Herein lies the danger of monetary earthquake along the fault line. The outstanding issue of FR notes as of September 20, 2007, was a paltry $760 billion (note that a sizeable fraction is being hoarded by foreigners overseas), see:, which is less than two tenth of one percent of the notional value of derivatives. Just a drop in the ocean of potential bad debt.

It is possible for the tectonic plate of hand-to-hand money, the FR notes to deflate, while that of electronic dollars to go into hyperinflation. The decoupling has frightening consequences for the financial and economic future of the world.

The curse of electronic dollars

Helicopter Ben has just made a most unpleasant discovery. Earlier he has promised that the Federal Reserve will not stand idly by while the dollar deflates and the economy slides into depression. If need be, he will go as far as having dollars air dropped from helicopters.

Time has come to make good on those promises in August when the subprime crisis erupted. To his chagrin Ben found that electronic dollars, the kind he can create instantaneously at the click of the mouse in unlimited quantities, cannot be air dropped. They just won't drop.

For electronic dollars to work they have to trickle down through the banking system. The trouble is that when bad debt in the economy reaches critical mass, it will start playing hide-and-seek. All of a sudden banks become suspicious of one another. Is the other guy trying to pass his bad penny on to me? In extremis, one bank may refuse to take an overnight draft from the other and will insist on spot payment. A field day for Brink's. The clearing house is idled, and armored cars run in both directions up and down Wall Street delivering FR notes and certified checks on FR deposits.

Under such circumstances electronic dollars won't trickle down. In effect they could be frozen and, ultimately, they may be demonetized altogether by the market. How awkward for Helicopter Ben. His boasting of air drops is an empty threat.

Northern Rock and Roll

The Northern Rock and Roll fever may spill over across the Atlantic from England to the United States. Northern Rock is a bank headquartered in Newcastle with lots of branches in the Northern Counties. It was a high-flyer using novel ways of financing mortgages through conduits and other SIV's, instead of using the more traditional methods of building societies through savings. (SIV or Structured Investment Vehicle is euphemism for borrowing short, lending long through securitization). Now a run on the bank has grounded the high-flier. As long queues in front of the doors of branch offices indicate, a world-wide run on banks may be in the offing. Bank runs were thought to be a pathology of the gold standard. In England they haven't seen the like of it since 1931 when the bag lady of Threadneedle Street went off gold. Surprise, surprise: bank runs are now back in vogue playing havoc on the fiat money world. Depositors want to get their money. Not the electronic variety. They want money they can fold.

There's the rub. Pity Helicopter Ben. It looked so simple a couple of weeks ago. The promise of an air drop should stem any run. It sufficed to tell people that he could do it. No reason to mistrust the banks since they are backed up by air drops. Now people have different ideas. The air drop is humbug. Can't be done. Ben is bluffing. He has no authority to run the printing presses as he sees fit. He's got to have collateral. Moreover, as calculated by Alf Field writing in Gear Today, Gone Tomorrow (, September 6, 2007) if only ten percent of the notional value of derivatives is bailed out by dropping $500 FR notes the pile, if notes are stacked upon one another, would be nearly 9000 miles high. Helicopter Ben hasn't reckoned that FR notes do not exist in such quantities. They will have to be printed, not to say collateraliyed, before they can be dropped. It is true that the Federal Reserve has an additional $225 billion in unissued and uncollateralized FR notes, just in case. However, before the air drop they have to be collateralized, and that is easier said than done. There is not enough of T-bills and agency securities to be used as collateral.


What does it all mean? At minimum it means that we can have inflation cum deflation. I am not referring to stagflation. I refer to the seemingly impossible phenomenon that the money supply inflates and deflates at the same time. The miracle would occur through the devolution of money. This is Alf Field's admirable phrase to describe the "good money is driven out by bad" syndrome a.k.a. Gresham's Law. Electronic dollars driving out FR notes. The more electronic money is created by Helcopter Ben, the more FR notes will be hoarded by banks and financial institutions while passing along electronic dollars as fast as they can. Most disturbing of all is the fact that FR notes will be hoarded by the people, too. If banks cannot trust one another, why should people trust the banks?

Devolution is the revenge of fiat money on its creator, the government. The money supply will split up tectonically into two parts. One part will continue to inflate at an accelerating pace, but the other will deflate. Try as they might, the government and the Federal Reserve will not be able to print paper money in the usual denominations fast enough, especially since the demand for FR notes is global. Regardless of statistical figures showing that the global money supply is increasing at an unprecedented rate, the hand-to-hand money supply may well be shrinking as hoarding demand for FR notes becomes voracious. The economy will be starved of hand-to-hand money. Depression follows deflation as night follows day.

Decoupling tectonic plates

Next to deflation of hand-to-hand money there will be hyperinflation as the stock of electronic money will keep exploding along with the price of assets. You will be in the same boat with the Chinese (and the son of Zeus: Tantalus). You will be put through the tantalising water torture -- trillions of dollars floating by, all yours, but which you are not allowed to spend. The two tectonic plates will disconnect: the plate of electronic dollars from the plate of FR notes, with lots of earthquakes along the fault line. No Herculean effort on the part of the government and the Federal Reserve will be able to reunite them. At first, electronic dollars can be exchanged for FR notes but only against payment of a premium, and then, not at all.

The curse of negative discount rate

If you think this is fantasy, think again. Look at the charts showing the collapse of the yield on T-bills. While it may bounce back, next time around the discount rate may go negative. You say it's impossible? Why, it routinely happened during the Great Depression of the 1930's. Negative discount rate means that the T-bill gets an agio, the discount goes into premium even before maturity, and keeps its elevated value after. This perverse behavior is due to the fact that T-bills are superior to FR notes in that they earn a yield while they are just as acceptable (if not more acceptable in very large amounts) as are FR notes. Yes, people will clamor for money they can fold, the kind that is in demand exceeding supply, the kind people and financial institutions hoard, the kind foreigners have been hoarding for decades through thick and thin: FR notes. Thus T-bills are a substitute for the hard-to-come-by FR notes. Mature bills may stay in circulation in the interbank market, in preference to electronic dollar credits. Why, their supply is limited, isn't it, while the supply of electronic dollars is unlimited! The beauty of it all is that we have an accurate and omnipresent indicator of the premium that cannot be suppressed like M3: the (negative) T-bill rate. It is an indicator showing how the Federal Reserve is losing the fight against deflation.

Inverted pyramid of John Exter

The grand old man of the New York Federal Reserve bank's gold department, the last Mohican, John Exter explained the devolution of money (not his term) using the model of an inverted pyramid, delicately balanced on its apex at the bottom consisting of pure gold. The pyramid has many other layers of asset classes graded according to safety, from the safest and least prolific at bottom to the least safe and most prolific asset layer, electronic dollar credits on top. (When Exter developed his model, electronic dollars had not yet been invented; he talked about FR deposits and other bank deposits built upon them as fractional reserve.) In between you find, in decreasing order of safety, as you pass from the lower to the higher layer: silver, FR notes, FR deposits, T-bills, agency paper, T-bonds, other loans and liabilities of the banking system denominated in dollars. In times of financial crisis people scramble downwards in the pyramid trying to get to the next and nearest safer and less prolific layer underneath. But down there the pyramid gets narrower. There is not enough of the safer and less prolific kind of assets to accommodate all who want to "devolve".

Devolution is also called "flight to safety". An example occurred on Friday, August 31, 2007, as indicated by the sharp drop in the T-bill rate from 4 to 3%, having been at 5% only a couple of days before. As people were scrambling to move from the higher to the lower layer in the inverted pyramid, they were pushing others below them further downwards. There was a ripple effect in the T-bill market. The extra demand for T-bills made bill prices rise or, what is the same to say, T-bill rates to fall. This was panic that was never reported, still less interpreted. Yet it shows you the shape of things to come. We are going to see unprecedented leaps in the market value of T-bills, regardless of face value! You have been warned: the dollar is not a pushover. Electronic dollars, maybe. But T-bills (especially if you can fold them) and FR notes will have enormous staying power. Watch for the discount rate on T-bills morphing into a premium rate!

It is interesting to note that gold, the apex of the inverted pyramid, remained relatively unaffected during the turmoil in August. Scrambling originated in the higher layers. Nevertheless, ultimately gold is going to be engulfed by the ripple effect as scrambling cascades downwards. This is inevitable. Every financial crisis in the world, however remote it may look in relation to gold, will ultimately affect gold, perhaps with a substantial lag. The U.S. Government destroyed the gold standard 35 years ago, but it could not get gold out of the system. It was not for want of trying, either, as we all know. Gold remains firmly embedded as the apex of Exter's inverted pyramid. Incidentally, it is a lie that gold has been demonetized. Gold is still a collateral used for FR notes. What happened was that further monetization of gold was blocked by fixing the official price of gold at $42.22 per Troy ounce, and at that price nobody is offering gold to the Federal Reserve. If someone did, according to existing statutes the Federal Reserve was duty bound to monetize it. Shame on academia for spreading lies about the demonetization of gold!

Vertical devolution is not the only kind that occurs in the inverted pyramid. There are similar movements that can be described as horizontal. Nathan Narusis of Vancouver, Canada, is doing interesting research on the Exter-pyramid. He noted that in addition to vertical there is also horizontal devolution. Within each horizontal layer of the same safety class there are discernible differences. An example is the difference between gold in bar form and gold in bullion coin form, or silver in bar form and silver in the form of bags of junk silver coins. Franklin Sanders in Tennessee is an expert on horizontal devolution of silver and has a fascinating study how the discount on bags of junk silver coins may go into premium, and vice versa. There may also be differences between FR notes of older issues and FR notes of the most recent vintage. There are obvious differences between the CD's of a multinational bank and those of an obscure country bank. The point is that movement of assets horizontally between such pockets within the same safety layer is possible and may be of significance as the crisis unfolds and deepens.

Dousing insolvency with liquidity

In a few days during the month of August central banks of the world added between $300 and 500 billion in new liquidity in an effort to prevent credit markets from seizing up. The trouble is that all this injection of new funds was in the form of electronic credits, boosting mostly the top layer where there was no shortage at all. Acute shortage occurred precisely in the lower layers. This goes to show that, ultimately, central banks are pretty helpless in fighting future crises in an effort to prevent scrambling to escalate into a stampede. They think it is a crisis of scarcity whereas it is, in fact, a crisis of overabundance. They are trying to douse insolvency with liquidity.

I feel strongly that this aspect of research on the denouement of the fiat money era has been lost in the endless debates on the barren question whether it will be in the form of deflation or hyperinflation. Chances are that it will be neither, rather, it will be both, simultaneously. There is a little-noticed and little-studied continental drift beween the money supply of electronic dollars and that of FR notes. (Continental drift of the geological variety is invisible and can only be detected with the aid of high-precision instruments.) The tectonic plate of electronic dollars will keep inflating at a furious pace, while that of FR notes and T-bills will deflate because of hoarding by financial institutions and the people themselves. The Federal Reserve will be unable to convert electronic dollars into FR notes. Apart from lack of collateral, present denominations cannot be printed fast enough, physically, in times of crisis. If the Federal Reserve comes out with new denominations by adding lot more zero's to the face value of the FR notes, Zimbabwe-style, then the market will treat the new notes the same way as it treats electronic dollars: with contempt.

Genesis of derivatives

Alf Field (op.cit.) is talking about the "seven D's" of the developing monetary disaster: Deficits, Dollars, Devaluations, Debts, Demographics, Derivatives, and Devolution. Let me add that the root of all evil is the double D, or DD: Delibetare Debasement. In 1933 the government of the United States embraced that toxic theory of John Maynard Keynes (who borrowed it from Silvio Gesell). It was put into effect piecemeal over a period of four decades. But what the Constitution and the entire judiciary system of the United States could not prevent, gold did. It was found that gold in the international monetary system was a stubborn stumbling block to the centralization and globalization of credit.

So gold was overthrown by President Nixon on August 15, 1971 by a stroke of the pen, as he reneged on the international gold obligations of the United States. This had the immediate effect that foreign exchange and interest rates were destabilized. The prices of marketable goods embarked upon an endless spiral. In due course derivates markets sprang up where risks inherent in interest and forex rate variations could allegedly be hedged. The trouble with this idea, never investigated by the economic profession, was that these risks, having been artificially created, could only be shifted but never absorbed. By contrast, the price risks inherent in agricultural commodities are nature-given and, as such, can be absorbed by the speculators.

This important difference between nature-given and man-made risks is the very cause of the mushrooming proliferation of derivatives markets, at last count half a quadrillion dollars strong (or should I say weak?!) Since the risk involved in the gyration of interest and forex rates can only be shifted but cannot be cushioned, there started an infinite regression as follows.

Let us call the risk involved in the variation of long-term interest rates x. The problem of hedging risk x calls for the creation of derivatives X (e.g., futures contracts on T-bonds). But the sellers of X have a new risk, call it y. Hedging y calls for the creation of derivatives Y (e.g., calls, puts, strips, swaps, repos). Now the sellers of Y have a new risk called z. The problem of hedging z will necessitate the creation of derivatives Z (such as options on futures and, with tongue in cheek: futures on options, options on options, etc.) And so on and so forth, ad infinitum. Thus the construction of the Tower of Babel is merrily going on.


We have to interpret the new phenomenon, the falling tendency of the T-bill rate. Maybe the financial media will try to put a positive spin on it, for example, that it demonstrates the newly-found strength of the dollar. However, I want to issue a warning. Just the opposite is the case. We are witnessing a sea change, tectonic decoupling, a cataclismic decline in the soundness of the international monetary system. The world's payments system is in an advanced state of disintegration. It is the beginning of a world-wide economic depression, possibly much worse than that of the 1930's. The falling T-bill rate must be seen as a sign of the government of the U.S. and the Federal Reserve losing their battle against deflation. We have reached a landmark: that of the breaking up of centralized and globalized credit, the close of the dollar system.

J'accuse -- said Zola when he assailed the French government for fabricating a case of treason against artillery captain Alfred Dreyfus in 1893. It is now my turn.

J'accuse -- the government of the United States under president Roosevelt reneged on the domestic gold obligations of the U.S. in violation of the Constitution: it violated people's property rights in confiscating gold without due processes

J'accuse -- academia has been pussyfooting the government by failing to point out the economic consequences of gold confiscation, namely, the prolonged suppression of interest rates that was ultimately the cause of prolonging depression. (The causal connection between gold confiscation and the prolonging of the Great Depression should be clear. Gold must be seen as the main competitor of bonds. Once the competitor is forcibly removed from the scene, bond prices start rising or, what is the same to say, interest rates start falling. Linkage between falling interest rates and falling prices did the rest.)

J'accuse -- the government of the United States under president Nixon reneged on the international gold obligations of the U.S. thereby globalizing the monetary crisis in 1971

J'accuse -- cringing academia failed to point out the consequences of trying to oust gold from the monetary system: price spiral of marketable commodities world-wide; roller-coaster ride of long-term interest rates, up to 16 percent per annum and down to 4 percent per annum or lower and back up again; and, last but not least, the fact that interest rates may take prices along for the ride

J'accuse -- foreign governments accepted Nixon's breach of faith without demur, apparently because in exchange for their compliance they were given the freedom to inflate their own money supply with abandon on the coattails of dollar inflation

J'accuse -- the banks have embraced the regime of irredeemable currency with gusto and greatly profited from it, instead of protesting that under such a regime it was impossible to discharge the bank's sacred duty to act as the guardian of the savings of the people, and to protect the value of the estate of widows and orphans

J'accuse -- the accounting profession for their compliance in accepting grieviously compromised accounting standards that allows the conversion of liabilities into assets in the balance sheets of the government and the Federal Reserve.

J'accuse -- Ben Bernanke is lying to the people in stating that he has the authority to print and air dop FR notes in order to fight deflation; the notes must be collateralized

J'accuse -- the financial press is lying to the people in parroting the propaganda line that gold has been demonetized; gold is still used as collateral for FR notes

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In the words of Chief Justice Reynolds, in delivering the dissenting minority opinion on the 1935 Supreme Court decision that upheld president Roosevelt's confiscation of the people's gold:

"Loss of reputation for honorable dealing will bring us unending humiliation. The impending legal and moral chaos is appalling."

No less appalling, we may add, is the impending financial and economic chaos.


Alf Field, Gear Today, Gone Tomorrow,, September 6, 2006

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Sep 29, 2007

London Times reports Bank of England's defective gold

The Times of London today picked up Metal Bulletin's recent story about the inability of Bank of England gold to meet the "good delivery" standards of the London Bullion Market Association. But the basic details about the quality and disposition of the gold remain unclear, even as the bank easily could clarify them, just as the disposition of U.S. gold reserves remains unclear and those reserves have not been audited in a half century.

There is a reason for all this unnecessary mystery, and it is that the British and U.S. governments simply do not want their citizens and the world to know what is really being done with the gold.

Now even Citigroup has conceded that this gold is being used for the surreptitious manipulation of markets.

Having just acknowledged one part of the gold story, maybe The Times will move on to the next.

The newspaper's story on the defective quality of the Bank of England's gold is appended.

By Patrick Hosking
The Times, London
Saturday, September 29, 2007


It has long been the plaything of kings, the spoil of conquerors, and supposedly the safest investment that money can buy. But for the people of Britain, our national nest-egg may not quite be what it appears.

Hidden away in vaults under the City of London, Britain's hoard of gold bullion, regarded as the best insurance against any turmoil in global money markets, is beginning to crumble. The deterioration, some experts claim, may suggest that it is not pure gold.

The Bank of England, guardian of the 320-tonne stash under Threadneedle Street, admitted yesterday that cracks and fissures had appeared in some of its gold.

Questions put to the Bank, made under the Freedom of Information Act, revealed that this deterioration would temporarily reduce the gold's L4 billion value and make it more difficult to sell.

The discovery is a further embarrasment for the beleaguered Bank, coming only days after it was blamed in part for the Northern Rock crisis. But it said that most of the hoard remained in mint condition. It denied suggestions by some experts that the deterioration was evidence that the gold may have been adulterated with base metal.

"This is not about purity; this is about physical appearance," the Bank insisted, saying that its bars were 99.9 per cent pure gold. The problem was due to the age of the bars, many of which were imported from the US in the 1930s and 1940s.

Although the gold carries assay marks, a guarantee from the refiner of its purity, there are no accompanying assay certificates, now regarded as essential by gold traders.

The Bank holds the gold on behalf of the Treasury, mainly in bars, but also in ingots and coins. Most of the hoard is thought to be stored in bars weighing between 10.9kg (24lb) and 13.4kg, and each worth between $258,000 (L123,000) and $317,000.

Revelations about its physical deterioration were secured by the trade journal Metal Bulletin, which has been trying to ascertain the truth since May. Rumours that the Bank's gold was not in tiptop condition have circulated in the gold market for years, but Stuart Allen, the Bank's deputy secretary, has now confirmed there is an issue.

To be traded, gold bars have to meet so-called London Good Delivery (LGD) standards, as laid down by the London Bullion Market Association. Mr Allen wrote to the journal: "There is some uncertainty about the status of LGD standards in respect of certain categories of gold bars that have been held in deep storage for many years."

The Bank was in discussions with the association to clarify how much of its gold was in substandard condition, Mr Allen added.

A Bank spokesman insisted it was not a big problem. The gold could easily be sent off to a refiner to be melted down and turned into new bars, he said. According to market observers questioned by Metal Bulletin, cracks and fissures suggested that the bars may not be pure gold. The gold in coin form may also be contaminated with base metal.

If 100 percent pure, the gold would be worth just over L4 billion at the current price of $738 an ounce.

The Government keeps reserves of gold and foreign currency to use to prop up sterling in times of adversity. In theory, in times of war, reserves could be used to finance emergency imports.

Britain's reserves have already been more than halved in recent years after Gordon Brown's controversial decision to sell 395 tonnes of gold between 1999 and 2002, when he was Chancellor. The soaring price since then has left critics questioning the decision and its timing.

Peter Ryan, an analyst at the consultant Gold Field Mineral Services, said: "I would guess that it would only be a small proportion that doesn't conform to standards and it would only be an issue if they needed to sell the gold. Some of this gold was acquired 30 or 40 years ago and standards do vary, but it is not difficult to fix." The gold price has been soaring recently as investors seek a hedge against the falling dollar and inflation worries. Strong demand from India, the biggest gold-consuming country in the world, has also boosted prices. There, gold jewellery, ingots and coins are a favourite wedding and festival gift.

Analysts suggested that the Bank, which declined to say how much tonnage was affected, would not be alone with its deteriorating bars. Many other central banks with reserves going back centuries could face similar problems.

Governments of Australia, Switzerland, the Netherlands, Argentina, and Belgium, as well as Britain, have sold gold reserves in recent years. Britain argued that gold represented too large and risky a proportion of its total reserves. But the fashion for selling reserves appears to have faded as the price has risen. Net government sales were only 328 tonnes worldwide last year, down 51 per cent, according to Gold Fields Mineral Services.

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Sep 28, 2007

Gold: Blue Skies Above...

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Citigroup acknowledges central bank scheme to suppress gold

A major New York investment house, Citigroup, this week acknowledged that central banks have been colluding to suppress the price of gold.

The acknowledgement came in a long report on the prospects for the metals and mining industry, "Gold: Riding the Reflationary Rescue." It was written by Citigroup analysts John H. Hill and Graham Wark, who, in a section titled "Central Banks: Capitulating on Gold?," write:

"Official sales ran hot in 2007, offset by rapid de-hedging. Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price. Our sense is that central banks have been forced to choose between global recession or sacrificing control of gold, and have chosen the perceived lesser of two evils. This reflationary dynamic also seems to be playing out in oil markets."

You can read Citigroup's acknowledgement of the central bank scheme to suppress gold on Page 7 HERE

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Sep 25, 2007

James Turk: Four Important Charts

Gold Money's editor James Turk has a simple -yet powerful- message derived from Four Important Charts.
You can check'em out at Gold Money web site by clicking HERE.

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Sep 24, 2007

Hugo Salinas Price: My Thoughts Today


by Hugo Salinas Price
President, Mexican Civic Association Pro Silver
September 21, 2007

Turmoil prevails. Lots of writing on financial and economic themes by worried people. All about "money".

What no one mentions is that what the world is using as money in these times, is not really money at all. What is called money today is only a means of exchange, and the transfer of this so-called "money" does not constitute payment. "Money" today, is NOT a means of payment, which is one of the essential functions of money.

Money has been defined as having three functions:

1. A means of exchange.

2. A means of payment.

3. A store of value.

Of these three functions, only ONE remains: a means of exchange.

Today's money is not a means of payment; ever since mankind used barter - before money existed - there did exist payment: each trader handed over something in exchange for something. That was PAYMENT. Payment is the delivery of some thing, in exchange for some thing.

Today, handing over a dollar, or a yen, or a euro - whatever - is not handing over something, nor even a claim on some thing. Therefore, handing over a dollar - or any so-called money today - is not really payment. It is not the delivery of any thing, nor of a claim on any thing. We are not "paying" in truth, because we do not deliver any thing. We do not use money, only a means of exchange.

World central bank reserves are neither a thing nor a claim on anything at all. Therefore, they are not a store of value; the falling exchange value of the dollar is a verification of this: that no money today can be a store of value. A non-thing cannot store value.

The Central Bankers of the world do not know what to do about their ever-increasing reserves; if any of them thought five minutes about money, they would understand that they are being very silly and playing games. If the CB reserves were gold - as they used to be - there would be no worry at all. Because gold is a tangible thing, but a dollar or a pound or a euro or a yen, or any other "monetary unit" is not a thing, it is only an abstract unit, a number.

Christian Noyer, on the ECB economic council and head of the Banque de France, does well to advise against "excessive accumulation of reserves"! Of course, it is always adviseable not to accumulate too much of nothing. "You got plenty o'nuthin' ", Christi ole boy! (And nuthin's plenty for you?)

Big shots and prestigious writers are talking and talking, and worrying and writing about "money", when what we are using all over the world, is not money! The best and brightest brains WILL NOT see that the world is not using money at all.

This blindness that prevails in the world is of vast philosophical importance. We are living in a deluded world and the outcome of this delusion is going to be nothing less than apocalyptic in its overwhelming, destructive consequences for mankind.

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Mike Kosares: What if you'd been waiting in line at Northern Rock?

By Michael Kosares
Centennial Precious Metals, Denver
Sunday, September 23, 2007

Who is at risk in Alan Greenspan's "Age of Turbulence? (And we should not doubt for a minute that we do indeed live in an age of unprecedented turbulence.)

Is it the Federal Reserve?

No, the Fed suffers no ramifications for any of its actions or pronouncements.

Is it the commercial banks?

No, the Fed will bail them out no matter what it takes all the while proclaiming that it would never do such a thing.

Is it the hedge funds?

No, they will be bailed out by their counterparties, the major commercial banks, which will be bailed out by the Fed.

Is it the investor in the hedge funds?

No, he will be bailed out by the hedge funds when they reposition themselves to meet the criteria of the commercial banks (after they get their much-needed credit-line extension).

Is it the holder of the shaky mortgage drawn into this hapless affair by signing on the dotted line at a sucker rate of interest?

No, he will be bailed out through one government machination or another by the politicians who know that their cushy jobs in the Beltway depend on the good will of all those who believe that their fate hangs perilouslously close to that of their less fortunate brethren.

So who is truly at risk?

It is those of you who have worked hard, saved, invested judiciously, and find yourselves in a position where you don't really have to ask anything of anyone. In other words, the individual who has been able to build up a little in the way of ASSETS.

Yes, you, my friends -- for if they cannot get it from you, in the form of taxes and inflation, they cannot get it at all!

What is the way out? The way around it?

Buy the metal (or in the case of those who already own gold, own more and subtract your fate from the designs of the plotters and planners -- the wide swath of those looking for someone to pay the huge bill that is coming due.

How are investors going to react when they discover that there are not many truly safe havens?

What if you were one of those people waiting in line at at one of the branches of Northern Rock in Britain?

First, investing in any kind of currency-based asset -- like stocks, bonds, bank deposits, and money markets -- is all basically the same thing. Your stock adviser might tell you that it would be a good idea in these perilous times to diversify between stocks and bonds and then to ladder the risk in each category.

What your stock adviser isn't going to tell you is that since all these assets are denominated in the local currency, you aren't really diversified at all.

One of the first questions that popped into my mind when the photographs of the queues outside Northern Rock branches were published was: What are these people going to do once they do get their money out of Northern Rock? Deposit it in another risky bank or money-market fund? Buy British gilts? Take it across borders to a different but equally precarious banking system? Buy U.S. Treasuries? Or believe the CNBC-style hype and put it into the stock market?

Ownership of any of these things represents only a lateral transfer, not a diversification, from the problem represented so tellingly by Northern Rock.

Gold's opponents realized early that the only real escape was hard, yellow metal and that's why they tried to knock down the price and cut gold off as an avenue of escape. They now seem to understand that it isn't going to work. Not even all the propaganda in the world can diminish the fundamental truth that gold is an asset that is not simultaneously someone else's liability. That is what makes gold a sound alternative in the context of recent events. All the other assets mentioned above rely on someone else's performance or ability to pay. As Alan Greenspan put it long ago, gold is the only primary asset that does not require endorsement.

(I am not advocating 100-percent conversion of your assets to physical gold, only a sensible proportion to hedge against monetary crises, bank runs, etc.)

So the next question is: What happens if a good segment of the investing public comes to the realization about gold at about the same time?

I really don't want to think about it. Do we on the gold side of the fence really want gold to become a mainstream alternative? If you can truthfully answer "yes" to that question, you are one of the lucky few who has positioned himself for what appears to be coming down the road. From this perspective it is more a negative than a positive that gold was featured favorably in The New York Times on Sunday. That's quite a statement from someone such as myself who has spent the past decade -- since 1997 when went up on the Internet -- taking on the mainstream press and its negative attitude toward gold.

My, how things change. I would much rather see gold sit in the background and act as a repository for those who truly understand its uses than to see the mainstream press admit those uses and promote them to the public.

Second, and this has more to do with future market effects than it does with a course of action for individual investors, what are the chances that the Fed's attempt to lower interest rates is going to be overcome by Treasury paper sellers trying to escape the falling dollar?

When Greenspan's attempt to raise interest rates collided with the interests of the export-driven economies to find a place for their dollar reserves, interest rates did not rise to the degree the Fed had hoped. This is what Alan Greenspan referred to as "the conundrum." Now we shall see if Ben Bernanke will find himself in the opposite position. (Bernanke's conundrum?)

We saw signs of what might happen along these lines earlier in the year when bond values fell mysteriously just as Congress was attempting to pressure China over yuan policy. Some thought China was selling Treasuries as a warning. In any case interest rates began to move up on their own once again, contrary to Fed policy.

Strangely, the Fed could find itself operating under an odd set of circumstances. By proving its ability to govern interest rates and monetary policy, it could very well destroy itself and the dollar -- the proverbial dragon eating its tail.

For several years now I have been talking about the Fed losing control of interest rates and monetary policy. This isn't just interesting (or boring) economic discussion. This goes to the heart of the current monetary order and how policy-makers are going to deal with the array of problems affecting all of us, not just the banks or the traders in New York.

If the Fed no longer has control of monetary policy, what good is it? What is its purpose? What is the economic function of the Federal Reserve? What is its social purpose?

Over the weekend the Financial Times published an editorial that addressed the problem. "A decline in the dollar," the FT said, "would be welcome if it was slow, but if foreign investors anticipate inflation and start to dump some of their $12,000 billion in U.S. debt, it could turn into a rout. In the worst case the Fed could lose control of monetary policy."

Obviously, the one function it will sustain is the one for which it was created: lender of last resort. Perhaps that will be enough, but it also could mean an inflationary spiral unlike anything we have ever seen as the Fed attempts to gun the monetary engines to compensate for foreign-based Treasury sales or lack of interest in financing the still-growing U.S. debt.

The response in most places will be the local central bank's gunning of the engines in its own right. Already there is a battle in Europe between the politicians and central bankers over fiscal responsibility and looseness or tightness in monetary policy.

It is interesting that Greenspan concentrates now on this same question of fiscal madness at the federal government. I look forward to reading his book to see if he has anything to offer in the way of solutions. For years I have advocated resurrecting the concept of a U.S. budget required by law to be balanced. Most state government operate quite effectively under that burden. Why can't the federal government? I also like Greenspan's response when asked by Newsweek magazine if he had a favorite in the presidential campaign: "Is one of the choices leaving the office open?"

At a time when America is preoccupied with the possibility of an economic breakdown, not one presidential candidate has been able to make anything close to an intelligent comment. That speaks volumes.

First comes perspective. Then proportion. Then peace of mind.


Michael Kosares is president and founder of Centennial Precious Metals in Denver and host of its Internet bulletin board, the Forum.

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Sep 23, 2007

Adrian Ash: New to The Gold Market?


by Adrian Ash
September 21, 2007

"...Are you looking to buy gold? Have you thought about why? What's in it for you...?"

IF YOU'RE LOOKING to buy gold today, please let me stop you and advise a cold bath.

I mean, have you thought about why? It's just a lump of metal. Why would anyone ever want to buy gold at today's prices?

After all, gold doesn't pay you an income. So it can only compete with cash-in-the-bank (provided its safe) or government bonds (provided they pay) when inflation rises faster than interest rates. That's what happened when gold rose eight-fold for US citizens in the late 1970s. It doubled in price when this happened again – and inflation beat interest rates – in 2003-2006.

Nor can gold compete with stock-market shares when the economy is growing and real revenues rise. It remains the most unproductive of assets, an inert metal with few industrial uses.

That means gold has no future profits to promise you. But for the very same reason, it also means gold doesn't rely on consumer spending, new business investment or clever balancesheet gimmicks for its value. Gold is simply a rare, precious metal that people all over the world have used to store wealth for more than 5,000 years.

And right now, that simplicity is gold's unique appeal.

Buying gold is as far as you can get from today's complex and exotic debt markets. They're making headlines for all the worst reasons today, as banking stocks plunge, mortgage-bonds slip into default, and losses pile up at hedge funds.

Gold, on the other hand, is recording near three-decade highs, and it still doesn't owe anything to anyone. In our current financial marketplace, that makes gold rarer still.

Gold's lack of "default risk" also sets it apart from the mountain of debt built up by Western consumers and their governments. The big picture?

* The average British household now owes nearly £9,000 (almost $18,000) even before you account for their record mortgage debts;

* The US government has run up $9 trillion in debt, much of it owed to fast-growing Asian economies like China and all of it waiting for US taxpayers to make the repayments;

* Even in Europe, the single currency Eurozone now faces a housing-debt slump in Ireland and Spain. Italy may have to pull out of the Euro. Greece's high-spending government should have pulled out five years ago.

Compared to this epidemic of debt, very few people own gold. Fewer still own it outright, in their name alone. Whereas the global derivatives market of financial promises has doubled in three years to stand above $415 trillion. That's more than eight times the value of the entire world economy!

Last month, it was mortgage-backed bonds and the complex contracts they've spawned that froze the interbank lending markets completely. Much of the betting has turned out to be worthless, and the fear remains that the worst losses have yet to show up. Of course, gold might also lose value. But unlike a mortgage-backed bond it can never go to zero, not according to 5,000 years of world history. And so far in this global credit crunch, the gold market's response shows that its "safe haven" status has only grown stronger.

In a nutshell, that's why the gold price has now shot to a 27-year high. But is today, right at the top of the chart, the right time for you to buy gold?

Six weeks ago would have been better; gold has risen 10% since then against the Dollar, Pound Sterling and Euro. Buying gold six years ago would have been better still. Early gold buyers spotted trouble ahead, and they have been rewarded for taking a risk on this no-income asset.

Since 2001 gold has very nearly doubled against the world's five major currencies. For Japanese gold buyers it's risen three-fold in terms of the Yen. But very few early investors appear to be selling just yet, and many respected analysts agree with their logic – that the real trouble in world finance has barely begun.

Think of the current "credit crunch" as a major sporting event, says Jon Markman for MSN Money. After speaking to Satyajit Das – "one of the world's leading experts on credit derivatives, author of a 4,200-page reference work on the subject, and developer and marketer of the exotic instruments himself over the past 30 years" – he now believes we're just hearing the national anthem played before the game really begins.

"It won't end well for the global economy," says Das, actually laughing! Buying gold now could prove a wise decision if this crisis gets worse before the world's debt problem is cured.

Buying gold does not come without risks, however. The gold market remains highly volatile over short-term periods of time, twice as volatile as US stock markets in fact. And even if the bull market starting in early 2000 runs for another seven years from here, you must expect sharp and severe pullbacks in the meantime.

"Gold rose 600% in the 1970s," as Jim Rogers, world-famous commodities trader and best-selling author of Adventure Capitalist, put it recently. "Then gold went down nearly every month for two years. Most people gave up."

You can't blame investors who quit the gold market between 1975 and 1977 for putting their money elsewhere. The gold price fell very nearly in half!

But that’s simply "what happens in bull markets," as Jim Rogers says, and between 1977 and 1980, "gold went up another 850%."

Fast forward to gold's current bull market, and it enjoyed another huge surge before May 2006, rising by $230 per ounce in only six months. That spring, and for the first time in more than two decades, gold began making headlines at last – and the price promptly slumped by one fifth.

There's no reason to think a sharp pullback won't happen again. There's every reason to wish that you'd bought back at $575 per ounce in October last year, rather than $730 today. Ask your financial advisor, and he (or perhaps she, but it's distinctly "men only" work here in London) should would warn you that, after six years, gold's bull market could soon burn itself out.

Your advisor should then point to the 1980s and '90s, and show you how gold just kept sinking, year upon year upon year. Any US investor or saver who bought gold in Jan. 1980 suffered a 70% loss over the next 20 years. They still won't be even today!

So don't think it can't happen. Be sure to accept responsiblity for your decision if you do choose to buy gold. That way, you'll sleep better at night – which is the No.1 reason people ever buy gold in the first place.

To buy peace of mind, a defense against the bad things that happen when credit and money start to crumble.

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Sep 22, 2007

Fears for global economy propel gold price

By Ambrose Evans-Pritchard
The Telegraph, London
Saturday, September 22, 2007

The moment every gold bug has been waiting for finally arrived this week when "Barbaric Relic" smashed through resistance to close the week at a 27-year high of $737 an ounce on the London PM Fix.

A heady mix of a collapsing dollar, a British banking crisis, and widespread suspicion that central banks are slackening in the fight against inflation combined to propel gold above the $730 peak of May 2006.

Analysts say there is now "clear blue sky" until reaching the all-time record of $850 in December 1980, when speculators drove it up in a parabolic rally at the end of the great inflation crisis.

Greg Wilkins, chief executive of the world's top producer Barrick Gold, said the shock half-point rate cut by the US Federal Reserve had been the trigger for a major breakout.

"I think it's a perfect storm," Wilkins said. "What we have is inflation plus lower interest rates, and that's not something that we've seen before. I think that's going to be very bearish for the dollar, which is conversely good for gold."

Adding to the mood of euphoria, the autumn is typically a season for gold rallies, and Spain's central bank has at last halted its bullion sales.

Madrid has been a major cap on prices this year, flooding the market with 150 tonnes. The bank has now cut its total holdings by 46 percent, leaving the country with wafer-thin foreign reserves.

Experts suspect that Asian central banks may have become buyers. China has less than 2 percent of its vast $1,340 billion reserves in gold and has signalled an intent to diversify away from dollars.

President Vladimir Putin has instructed Russia's central bank to raise the gold share of its huge reserves from around 5 percent to 10 percent.

The Fed's aggressive rate cut at a time when oil is hovering at an all-time high of $82 a barrel and food prices are rocketing has created the impression that the US authorities are willing to tolerate higher inflation rather that allow the credit and housing bubble to deflate fully.

As recently at late July the Fed warned that inflation remained the "predominant" risk to the economy. Although price rises were tame in August, there are concerns that the headline CPI rate could jump from the current 2.4 percent to nearer 3.5 percent. China's inflation jumped to 6.5 percent in August and price pressures are developing across Asia, the Middle East, and Eastern Europe.

The Federal Reserve may be right in calculating that the US housing slump is now so serious that it will slow the economy sharply, dampening global price pressures over time. But for now a large number of well-heeled investors are willing to bet otherwise.

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Sep 20, 2007

Gold hits 28 year high

Gold tops 28 year high


Antal Fekete: Peak Gold! - A Primer on True Hedging, Part Four

Concluding his four-part series "Peak Gold," hard-money economist Antal Fekete notes that Barrick Gold's two top executives just sold a lot of shares in the company even as they were predicting a big decline in worldwide gold production and a corresponding rise in gold's price. Fekete says this is a repudiation of Barrick's hedging practices and shows that Barrick's crew is getting in the lifeboats before their passengers, the shareholders, do.

Note: for Part I please click HERE,
           for Part II HERE,
 and for Part III HERE

Antal E. Fekete
Gold Standard University Live

„A hedged gold mine is a hole in the ground with a liar standing next to it”

(With apologies to Mark Twain for refining his aphorism)

Putting the cart before the horse

As discussed in Part One, a most unusual conference call took place on August 3 last. Barrick President Greg Wilkins and Executive Vice President and CFO Jamie Sokalsky officially proclaimed Peak Gold! by disclosing that according to research commissioned by the company world gold production has peaked and will decline from now on. They suggested that we might expect a 10 to 15% drop in overall mine supply of gold within the next five to seven years, with obvious positive implications for the gold price. This was widely reported in the financial press.

What makes the announcement highly unusual, not to say suspect, is the fact that industry-leader Barrick still has 9,5 million gold ounces worth of open hedges and will suffer accordingly in the rising-price environment. It is just not logical, and even appears masochistic, to make such an upbeat announcement about the gold price first, and lift the hedges afterwards (as it is the destiny of all hedges to be lifted ultimately).

Since the company was in possession of such an explosive information impacting the gold price, the logical procedure should have been to lift the hedges first, and to release the report afterwards. The reverse-order procedure could hurt the company financially, hurting shareholders even more. Could it be that the top brass of the company has a hidden agenda and treats shareholders as dummies who do not understand the negative impact on the hedge book of a positive spin on the gold price by putting it even deeper under water?

Captain and mate, first in the life boat

Well, we did not have to wait too long for the solution to the puzzle. On September 9 President Greg Wilkins exercised 100,000 options for company shares at $27.30 each and sold all these shares the same day at prices ranging from $38.30 to $38.80. Next day, on September 10, executive vice president and chief financial officer Jamie Sokalsky turned up, and exercised 35,000 options for company shares at $23.80 each. Then, between September 10 and 14, he exercised 90,900 more options for company shares at prices ranging from $29.20 to $30.70 each. He sold all these shares the same day at prices ranging from $36.70 to $36.74, thereby reducing his total company holdings to zero. Total company holdings of president Wilkins was brought back to the original 47,500 shares  according to the Canadian newspaper National Post, September 17 and 18, 2007. After all, it is fitting that the president of a company own at least a few shares in the company, however reluctantly.

It is hard to escape the conclusion that the captain and his mate want to be the first to claim their seats in the life boat, ahead of women and children. By releasing that most optimistic report Wilkins and Sokalsky jacked up the share price artificially so that they could exercise their options, only to sell the shares right away while selling was still good  and leave shareholders to their fate. If the share price collapses thereafter, too bad. The main thing is that captain and mate were home safe. Shareholders can be Barricked.

The sight of the captain and his mate grabbing the first seats in the life boat ahead of women and children is repulsive enough. But it is impossible to find the right words to express moral indignation if we consider that the mate is personally responsible for the calamity awaiting shareholders aboard the badly damaged ship, caused by the insane hedging policy of Barrick.

As reported in this column, I have challenged Sokalsky to explain why he had failed to heed my warning ten years ago that the unilateral hedging policy of the company is not only false but extremely dangerous for a gold mining company, in view of the 100% mortality rate of irredeemable currencies. I also gave him a copy of my 50-page memorandum entitled Gold Mining and HedgingWill Hedging Kill the Goose to Lay the Golden Egg? which spelled out that there was such a thing as bilateral hedging. It is harmless and potentially just as profitable even in a bear market as unilateral hedging, if not more profitable. Above all, it is true hedging as opposed to false hedging.

My challenge has been ignored. Now we know why. Sokalsky and his boss were busy bailing out. Is S.S. Barrick sinking after hitting the iceberg of $700 gold? Time will tell. The ship is certainly badly damaged by the collision. The question Barrick shareholders must ask themselves is whether it is wise to entrust their fortunes to a heavily hedged company whose chief financial officer has just reduced his own exposure as a shareholder to zero and, together with the CEO, apparently has better ideas where to park his money. The case for owning Barrick shares speaks for itself.

In Part Three of this series I have explained the extremely precarious financial position of Barrick due to its 9,5 million ounces of open hedges, already deep under water, in a rising gold-price environment. Barrick’s strategy is built upon the assumption, spelled out in the company’s last Annual Report, namely, that gold lease rates remain stable. This assumption has now been fatally shaken by events in the gold market during the past couple of weeks. The specter of the supply of lease gold drying up looms large in the horizon. In consequence lease rates could explode, making one ounce of gold in hand worth several ounces in the bush (that is, locked up in ore reserves). There is no way to hedge against the risk that demand for cash gold will surpass supply of gold for lease. It is totally irrelevant what Barrick says about the flexibility of its arrangements with the bullion banks. Barrick’s capital may turn out to be insufficient while bleeding gold in delivering mine output into the hedgebook for nothing. It is entirely possible that we are witnessing danse macabre, the last contango for Barrick. Backwardation of gold remains an enormous threat to Barrick’s survival. After all, Messrs. Wilkins and Sokalsky should know best. They don’t want to own Barrick shares. They have voted. With their feet.




A.E.Fekete, Peak Gold! Part Two , September 10, 2007.

A.E:Fekete, Peak Gold! Part Three , September 19, 2007.

September 20, 2007

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Sep 19, 2007

William Greider: The lies of Alan Greenspan

By William Greider
The Nation, New York
via San Francisco Chronicle
Tuesday, September 18, 2007

Alan Greenspan has come back from the tomb of history to correct the record. He did not make any mistakes in his 18-year tenure as Federal Reserve chairman. He did not endorse the regressive Bush tax cuts of 2001 that pumped up the federal deficits and aggravated inequalities. He did not cause the housing bubble that is now in collapse. He did not ignore the stock market bubble that subsequently melted away and cost investors $6 trillion. He did not say the Iraq war is "largely about oil."

Check the record. These are all lies.

Greenspan's testimony endorsing the Bush tax cuts was extremely influential but now he wants to run away from it. In the instance of Iraq, Greenspan is actually correcting his own memoir, "The Age of Turbulence," which just came out. Last weekend, newspapers reported provocative snippets from the book, including this: "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

Wow, talk about your "inconvenient truth." Greenspan was blithely acknowledging what official Washington has always denied and the news media faithfully ignored. "Blood for oil." No, no, no, that's not what he meant, Greenspan corrected in a follow-up interview (with Bob Woodward in the Sept. 17 Washington Post). He was only saying that "taking out Saddam was essential" for "oil security" and the global economy.

Are you confused? Welcome to the world of slippery truth that Greenspan has always lived in. He was the Maestro, as Woodward's loving portrait dubbed him. Wall Street loved the chairman best because the traders and bankers knew he was always on their side and would come to their rescue. The major news media treated him like an Old Testament prophet. Whatever the chairman said was carved on stone tablets, even when it didn't make any sense, as it often didn't.

Some of us, who followed his tracks more closely, were not so kind. Harry Reid, now the Democratic Senate leader, said Greenspan was "one of the biggest political hacks in Washington." Amen. I called him "the one-eyed chairman" who could always spot reasons to stomp on the real economy of work and production, but was utterly blind to the destructive chaos in the financial system. No matter. The adoration of him was nearly universal.

Until now. The economic consequences of his rule are accumulating, and even the dullest financial reporters are stumbling on crumbs of truth about Greenspan's legendary reign. It sowed profound and dangerous imbalances in the U.S. economy. That's what happens when government power tips the balance in favor of capital over labor, favoring super-rich over middle class and poor, then holds it there for nearly a generation.

Things get out of whack and now the country is paying enormously. A pity reporters and politicians didn't have the nerve to ask these questions when Greenspan was in power.

He retired only a year ago, but is already trying to revise the history -- to explain away blunders that are now a financial crisis facing his successor; to rearrange the facts in exculpatory ways; to deny his right-wing ideological bias and his raw partisanship in behalf of the Bush Republicans.

The man is shrewd. He can see the conservative era he celebrated and helped to impose upon the American economy is in utter ruin. He is trying to get some distance from it before the blood splashes all over his reputation. Of course, he also came back to cash in -- an $8 million advance for a book that is sure to be a huge best-seller.

I don't want to be unkind, but Greenspan could have avoided all the embarrassing questions if his book was posthumous. I haven't read it yet. I have a hunch I am not going to like it.

William Greider, The Nation's national affairs correspondent, has been a political journalist for more than 35 years. A former Rolling Stone and Washington Post editor, he is the author of "One World, Ready or Not," "Secrets of the Temple," "Who Will Tell The People?," and, most recently, "The Soul of Capitalism" (Simon & Schuster).

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Antal Fekete: Peak Gold! - A Primer on True Hedging, Part Three

Peak Gold! - A Primer on True Hedging, Part Three

Note: for Part I please click HERE, and for Part II HERE

Antal E. Fekete
Gold Standard University Live

Double standard in gold hedging?

This is in answer to Mike Mish Shedlock’s rejoinder Double Standard in Gold Hedging? (September 11, 2007) to my Peak Gold! — Part Two (September 10, 2007). Mr. Shedlock challenges my claim that unilateral hedging by a gold mine, in particular, the practice of selling forward longer than one year, or quantities in excess of one year’s mine output is, in effect, a naked short sale, involving unlimited risk. I have suggested that unilateral hedging and forward sale of several years’ output are imprudent, fraudulent, and should not be allowed by the exchanges as they certainly are not in case of agricultural producers.

At this point I would like to remind my readers that the series Peak Gold! has not been concluded as I have not yet fully discussed what true (or bilateral) hedging as opposed to fraudulent (or unilateral) hedging is. But before I do that I feel it is necessary to answer the points raised by Mr. Shedlock, which I now do point by point in the same order he raised them.

Unlimited risk is for real

There is fraud involved in the practice of unlimited forward selling of gold beyond one year precisely because it may not be possible to deliver the gold as contracted. One year is the logical production cycle for gold. There is a difference between selling forward gold already in the pipelines moving towards the market, and selling forward gold still locked up in ore bodies. It is safe to assume that gold already in the pipelines will make it to the market. By contrast, gold locked up in ore bodies may not. The oft-quoted dictum that „there’s many a slip between cup and lip” applies. Ore has to be extracted, pulverized, processed, and refined. The company may not be there to do it if it goes bankrupt in the meantime for example, as a result of its foolish unilateral hedging policies.

The idea of ’unlimited risk’ involved in naked forward sales is real. The miner does not have the gold in hand. He has only a bird in the bush. In addition to the risk to potential profits there is the risk that the company will be foreclosed on its naked forward sales and go into receivership. Mr. Shedlock simply ignores the dynamics of the gold market. He ignores, for example, that forward sales as practiced by Barrick rely on gold lease rates remaining stable a fact admitted arrogantly in its last Annual Report. Perhaps Mr. Shedlock doesn’t realize lease rates are nothing more thaín the fulcrum upon which the dollar-rate of interest and the future price of gold teeter in balance. But what if no more gold were available for leasing, as will surely happen when the central banks finally empty their cupboards? Lease rates would explode as one piece of gold in hand would be worth severalin the bush. I am grateful to Tom Szabo of for pointing out to me that this could and would happen if the demand for gold becomes greater than the lease supply. There is no way to hedge against this risk. The fact is that gold could go into backwardation so fast as not to allow time for the company to take defensive action. It will matter little then that Barrick claims a great deal of flexibility in its gold contracts since the very thing it has egreed to receive in exchange for gold U.S. dollars will have lost all of its value. Does Barrick have enough capital to deliver the „hedged” gold for nothing, and will it be given much time to do so? This is where Barrick would fing that backwardation poses a serious obstacle to its survival as the value of future gold production, and thus that of a gold mine, is but a fraction of the same amount of gold when held in the hand.

Bullion bankers are, no doubt, a nice bunch of people when they coax the gold miner into the trap of unlimited risk. They will not be nearly so nice when they get ready to make their margin call and take their pound of flesh, as any Shylock worth the name would.

Sure, profit risk runs in both directions. This is exactly why true hedging must be bilateral involving forward purchases to complement forward sales. This is exactly why unilateral hedging is false hedging. It fails to be symmetric. Bullish sentiment is nipped in the bud, while the bearish variety is cheered on. It pretends to market a product at the best price available, but all it does is ruining its own market by inviting competitive short sales from other gold mines and speculators. Profit risk running in both directions is the whole point of my series on Peak Gold!, a primer on true hedging, if you just have the patience to hear me out. I wonder if Mr. Shedlock has read the section in Part Two on bilateral hedging, namely, how a downstream short leg (forward sale) of a hedge ought to be complemented by an upstream long leg (forward purchase) representing down payment on gold bearing properties that the gold mine is in the process of acquiring. Bilateral hedging works with four-legged straddles, a short and a long leg downstream, plus a long and a short leg upstream. Unilateral hedging tries to get by with one-legged straddles: the only leg being the short one downstream. I ask you: which is going to win the race?

A gold mine can never be smart enough to outsmart speculators who make it their business to forestall other market participants. It is outright stupid to pursue a market strategy of long-term forward selling, given the fact that in the futures markets nimble speculators make split-second decisions to turn from a buyer into a seller. By the time the gold mine, a dinosaur in comparison, has made its long-trumpeted forward sale, the speculators have run away with the best of the pick. Unilateral long-term forward selling of gold could work, but only if governments or central banks have underwritten the losses that are almost certain to accrue.

It is not a question of liking or not liking hedged mines. The demonstrable fact is that the leading hedger takes unfair advantage of all the other mines, hedged or unhedged, by forcing them to sell ahead of schedule at lower prices. Unilateral long-term forward selling is a predatory practice which enables the big fish to gobble up the small. No fair play is possible as long as the practice is allowed. For this reason the suggestion that if you don’t like hedged mines you should short them is puerile. Shorting a predator may be suicidal.

It is true that every production process has its production cycle. As Mr. Shedlock remarks, for agricultural commodities it is typically from harvest to harvest, or one year. Although for gold it is not so sharply delineated, it is reasonable to make the fiscal year to play that role. Once a year shareholders meet, elect new directors and there may be changes in management. Important decisions are made about acquiring new gold-bearing properties, prospecting, exploration, mine development. In this sense, yes, you plant in the first quarter to reap in the fourth, typically the busiest season for the gold mining concern.

It is true that, as far as its fundamentals are concerned, gold production is far more stable than the production of agricultural commodities or, for that matter, the production of any other good. This is what makes gold such a superb monetary metal. It is foolish to suggest that gold, as a result of its ’demonetization’, has ceased to have stable value fluctuating gold price notwithstanding. What the fluctuating gold price shows is not the lack of stability in the value of gold; it is the lack of stability in the value of paper currencies, issued by devaluation-happy governments, in which the price of gold is quoted. It is certainly not indicative of a mysterious disappearance of stability in the value of gold.

The fluctuating price of gold, as well as fluctuating forex and interest rates, are not nature- given as are the fluctuating prices of agricultural products. They are man-made. They have deliberately been inflicted upon the people by governments in betrayal of their sacred mission to protect them. The fluctuating gold price and gyrating bond prices are the instrument of the most vicious exploitation the world has seen since chattel slavery. The government in regulating futures trading has approved „double standards” in an effort to create a practically infinite supply of ersatz gold, including paper gold (such as gold futures that can be sold greatly in excess of physical gold in existence), and unmined gold locked in ore bodies below ground (which can then be sold forward), in the hope of keeping the price of cash gold in perpetual check. This is not a myth. This is a well-established fact admitted, at one time or another, by many a government in its more sober moments.


The world-wide regime of irredeemable currency would have come to a sorry end decades ago if it weren’t for gambling casinos foisted upon the world by governments hell-bent to keep the game of musical chairs going non-stop. Governments, in the best tradition of casino owners, want people to gamble in gold, bond, and forex futures. The futures markets in gold, bonds and forex serve a purpose, and one purpose only: to provide an outlet for the Niagara-on-Potomac, money supply gushing forth from the Federal Reserve that could drown the entire world in a hyperinflationary deluge. If it hasn’t, that’s because excess money has been soaked up by the gambling casinos. So far. People scramble for the excess because they could use them as chips at the gaming tables. But as growth in the derivatives markets (the size of which doubles every other year and by now exceeds half a quadrillion dollars or $500,000,000,000,000) shows, this is not a stable process secured with proper checks and balances. This is a runaway train on which the brakes (i.e., natural limitation on gold production) have been deliberately disabled. Fraudulent hedging of gold mines, and double standards in regulating futures trading are part of the sabotage. This is a world disaster waiting to happen.

Hedge fund masqerading as a gold mine

Mr. Shedlock has missed my point. We may honestly disagree on the question whether long-term unilateral hedges are prudent or fraudulent. But there is no ambiguity about the fraudulent nature of a hedge fund masquerading as a gold mine. If it is the world’s biggest gold mining concern, then the masquerade assumes cosmic proportions.

I repeat the verdict: the gold carry trade is criminally fraudulent. In more details: to lease gold, to sell it for cash, to invest the proceeds like a hedge fund, and to report the income from these investments as profit to shareholders, as if they were profit from gold mining operations, constitutes fraud. Paper profit is no profit. It is encumbered with a contingent liability, the extent of which cannot be ascertained until the hedge is lifted and the hedgebook closed. The trouble is that by that time management will have spent the ’profit’ taken out of the corporate treasury fraudulently.

The practice of window-dressing income statements using unrealized paper profits, especially as they are encumbered with unlimited liabilities, is a blatant fraud dealt with by the Criminal Code.

Are Barrick’s officers masochistic or incompetent?

In Peak Gold! Part One I mentioned that Barrick President Greg Wilkins and Executive Vice President and CFO Jamie Sokalsky announced extremely optimistic predictions about the gold price for the next five to seven years in a conference call that has been widely publicized. These predictions are based on a study of gold fundamentals commissioned by Barrick. (Reuters, August 3, 2007.)

Here is my parting shot to Mr. Shedlock. He says that he disagrees with Citigroup analyst John Hill, who publicly called on Barrick to rid itself of the remaining 9.5 million ounces left on its ’project’ hedge book. According to Shedlock Barrick should not cover those hedges now at $700. „If it did and the price of gold collapsed to $500, Barrick would be in a world of hurt… Barrick would be betting the farm that prices are heading north of $700 … and will stay there for quite some time… Is [this contingency] really worth betting the company on?”

I ask Mr. Shedlock what makes him think that Barrick’s actual bet (namely, that the price of gold will collapse to $500) is a more worthwhile contingency to bet the company on? Who is Messrs. Wilkins and Sokalsky trying to fool in making prognostications potentially very damaging to the financial health of the company in view of its hedgebook deeply under water? Are they masochistic? Do they think that they have been hired by the shareholders to run the company aground? Why did they not lift all their so-called hedges, as John Hill suggested and Newmont has done, in good time, before releasing such a devastating report putting the company in jeopardy? This is what common sense would seem to dictate, to lift the hedge first, and make the announcement afterwards, is it not? If they did not have and could not raise the money to do it, at the very least they should have suppressed the optimistic prognostication on the gold price, in order to soften the blow to shareholders who are going to suffer one way or another the consequences of gold breaking above $700, due to Barrick’s insane hedging policy.

It is understandable that Barrick’s officers are reluctant to admit publicly that they have made the most colossal blunder in the history of mining, by committing their company to the policy of unilateral downstream hedging through unlimited forward sales of gold. Such an admission would be hard on the ego. They may hope against hope that their blunder will be quietly forgotten, and the shareholders will buy the desperate propaganda-line that a higher gold price is good for them, hedgebook or no hedgebook.

But you cannot keep kicking garbage upstairs to the attic forever, because it will keep rotting there until something gives and the accumulated garbage will come crashing down.

I have issued a public challenge to Barrick to explain why they ignored my warning ten years ago that unilateral downstream hedging is a dangerous trap they should avoid. I also pointed out to the top brass how their hedge plan could be made bilateral, a winning combination. Had they listened to my advice, they would have avoided having to carry the yoke of a millstone-size hedgebook around their neck. I take this opportunity to report that Barrick has so far ignored my challenge.

I am not sold on the conspiracy theory according to which Barrick is a front set up by governments to keep the gold price in perpetual check. Not yet anyhow. But then, the only conclusion is that the officers of Barrick are incompetent bunglers whose name will go down in ignominy in the annals of mining.



September 10, 2007

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Hugo Salinas Price: A perpetual 'war on gold'?

Hugo Salinas Price, president of the Mexican Civic Association for Silver and longtime friend and supporter of GATA, speculates in a new essay, "A Perpetual 'War on Gold'?," about how governments could keep their gold-price suppression scheme going even after their gold reserves are exhausted.

It's by surreptitiously acquiring major gold producers and operating them at a loss, which would be very small by government and general market standards and easily could be hidden by the government. (The U.S. government and a major Canadian mining company may have thought this one up first.)

Salinas Price's essay is a bit of a downer but in this business it's better to get and stay down than to stand up with a big smile on your face, wide open for the next central bank intervention.

A perpetual 'war on gold'?

Originally posted at on September 15th, 2007

The method by which the price of gold is held back is through unlimited short selling in the futures market by parties acting for the governments interested in keeping the price down or under control, and by feeding into the market such amounts of gold as may be required by the market for physical gold. These amounts are relatively much smaller than the futures market transactions, where speculators participate mainly with the interest of realizing dollar profits, and not by taking delivery of physical gold.

We have been reading for many years now, about the likelihood that the Central Banks have been providing this gold for physical delivery, and about the ever-diminishing amount of gold which the Central Banks have available for sale into the market. We are assured that the Central Banks will reach a point at which they will refuse to sell more gold, either because they will judge it imprudent to part with their remaining reserves, or because they simply have no more to sell.

There exists a method which the Central Banks might use and which would allow them to carry on this “War Against Gold” for much longer than we might expect, and this method is to take control of the most important gold producers in the world, by buying a majority stockholding in each of them. Compared with figures on spending which we see every day, and gigantic fiscal deficits, such purchases would require only a comparatively tiny amount of dollars or euros.

Such gold producers would then become para-statal entities, government- owned entities whose profit and loss statements would be much less important than their contribution to a government policy, as is the case in a great many other para-statal entities which operate in other fields. In Capitalist countries governments are not supposed to run companies, but these days governments can do pretty much as they wish. “Anything Goes!”

These para-statal entities would then be milked of their gold, which they would be obliged to sell at preferential, below-market prices to their majority stockholder, through discreetly disguised operations. Upon perceiving this, the remaining minority stockholders would bail out. This policy of the main gold producers would affect the whole industry. The rest of the privately-owned gold mining industry would have a hard time staying in business against loss-making government-owned major producers; rising costs and stagnant prices would seal their doom. One by one, they would be picked up by the government-owned majors.

The government-owned gold producers would be able to run perpetual losses, made up by subsidies from their government owners out of the respective government budgets. This perpetual “War on Gold” would be relatively cheap and the cost easily hidden in the fiscal budgets, and provide the enormous advantage of retaining the reserve currency status for the dollar and the euro. It could go on for much longer than we probably expect. The cost/benefit ratio of this “War on Gold” would be highly in favor of the War.

We know that prices are always set “at the margin”. The cheapest seller always sets the price, both in the futures market and the physical market. So, all gold producers are forced to sell at the price set by the lowest, loss-making government-owned gold producers, at least as long as these last can come up with the physical for sale. Upward spikes in prices can be hammered with cheap physical sales, sold at strategic moments calculated to put the underlying trend into constant doubt, and introducing a volatility which can be exploited by the media to frighten prospective purchasers.

How would this “War on Gold” ever come to an end?

The end would come with market demand for cheap physical gold overwhelming all the amounts of newly-mined gold coming from government-owned mining industry and remaining private mining industry.

This demand might be fought by means of a control of the trading of gold, hosing down the attraction of gold through banking systems which would refuse to trade privately-owned gold or otherwise cooperate in hampering such trading. This would reduce the attractiveness of gold, as prospective purchasers always think of the possibility of mobilizing their gold at some point, and obstacles to doing so would make them think twice about purchasing it.

Only a great crisis would impel humanity into gold at all costs. The present crisis in the financial markets of the world is probably only a rehearsal for such a great crisis. This present crisis will probably be papered over successfully and within a few months or years, at most, the normal abnormality of exclusively fiat money in the world will return and confidence will once again be restored.

However, the great crisis which will restore gold to its proper place in human dealings is inevitable, for the reasons which Ludwig Von Mises pointed out so many years ago: fiat money leads to malinvestment, and the longer that credit expansion and the increase of fiat money in circulation goes on, the greater the corresponding malinvestment. One day, in the future, there will be a huge collapse as the worldwide malinvestment is so great, that it will not be possible to satisfy pressing human needs.

That great crisis may be triggered at some point by a nuclear world war, or by some event of a financial nature which we cannot foresee. That the great crisis will come, is completely inevitable. It will surely come together with bloody revolutions in human affairs.

Through the ownership of loss-making producers, the “War on Gold” could go forward for many years yet. The “War on Gold” is not truly a war on a metallic substance; in the final analysis, it is a war on the psychological health of mankind; another generation subjected to the maddening psychological effects of endless credit and fiat money creation upon humanity will leave our civilization – what is left of it – completely destroyed.

I must add that I earnestly hope that I am quite mistaken with regard to the possibility of a Perpetual War on Gold.

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