This post is my replies to two reader emails. The
first one was to "Victory", one day after my Gold as a FOREX Currency post went up. And the second one was to "Burningfiat"
on Friday.
Hello Victory,
"... My thinking is this, won't the end of $
support be clearly visible in the currency exchange
rate? Isn't that where the rubber meets the road, there really should be no
guesswork needed. The US is a perpetual net exporter of dollars and has long
ago hyper-inflated…"
There
is definitely a glut of dollars right now. In September the Fed announced its
new "reverse-repo" operations. There is, of course, a lot of debate
about what those are really about, but I think it is obvious that they are to
mop up the glut of dollars and raise short term interest rates in money
markets and t-bills. The Fed even said so. They
said that these operations will raise overnight rates in the money markets so
that lenders can actually earn some interest.
When there's a glut of dollars, it's hard for banks (who create dollars) or
money markets (who auction existing dollars) to make money on interest
because there's so much competition for the limited pool of borrowers. Too
many dollars drives interest rates to zero and even negative in some cases.
So the Fed is actually competing against real organic borrowers for its own
liabilities. The Fed will pay you to lend your extra dollars back to the Fed,
even though what the Fed is "borrowing" are its own liabilities. So
the Fed is creating synthetic demand for its own product to drive overnight
and short term interest rates higher.
You're looking for a crash in the USDX to indicate the imminent end, but I
have always expected a spike in the dollar, and I think Another expected that
as well. I have written in the past that we could even see the USDX spike
(very quickly mind you, not a slow rise) to something like 150.
What we see right now is big money piling into short duration, even
overnight, assets. To escape, that money will have to pass though dollars
once again. Where the rubber meets the road, in my opinion, is not anywhere inside
the monetary plane. Instead, it is where the monetary plane intersects
the physical plane, and that is in prices, the prices of real physical
things, the price of physical gold and the price of (primarily imported)
necessities. That's where I expect to see the break, in one of those two
places: the LBMA or a real price jump in necessities. Whichever one comes
first, I think it will quickly cause the second one to follow.
What that means, practically, is that either physical gold goes into hiding
first, or there's a sudden devaluation of the dollar against the physical
plane, meaning necessities, especially those necessities needed by the
USG which must be imported. When that happens, the USG will print whatever is
needed to keep its imported necessities flowing in under the aegis of national defense. Actual hyperinflation will follow.
When this happens, or a top level disruption within the LBMA, all that money
piled into short duration assets will panic out and bid for dollars which it
needs in order to pile into anything else. This will briefly drive the dollar
way up on the USDX. It may even happen before you know what's happening,
because big money tends to panic before small money even knows there's
something to panic about. Remember this story from Unambiguous Wealth 2?
"Compare these big money folks to the average
guy who rides the bus. You miss a bus, so what? It's inconvenient but another
bus will come. It takes a long time to sink in that another bus isn't coming.
It's not until there is such a big crowd waiting at the bus stop for the next
bus that people start thinking "even if a bus comes there are too many
people to fit on one bus." In that mindset the surest way to cause a
riot is to send one bus i.e., not enough buses. You have to fight to get to
the front of the queue. This is a bank run mentality.
And this is a key difference between the average guy and the big money. Big
money isn't used to being kept waiting. Big money owns the "bus
company". They know the buses aren't going to run before the little guy.
They panic early. There was an electronic bank run around the time of the
Lehman collapse. That was one of the reasons why governments around the world
stepped in with fresh deposit guarantees. But there were no lines outside the
banks to alert the average guy to what the Giants were up to.
Right now gold is $1,712 per ounce. If you have $200,000 in ambiguous claims
floating through system-space, your account is right now worth 116 one-ounce
gold coins of unambiguous wealth. But here's the thing. You are never going
to beat the big money to that panic button. There are enough gold coins on
the market right now that you could get your 116 of them without
affecting the price. But if you're waiting for the first signs of panic,
you're not going to get anywhere near 116. You'll be lucky to get six or
seven.
There's only one way to beat the Giants to the gold, and that is to run in
front of them."
Apply
this reasoning to the signals you are watching. Even though you aren't
waiting to buy gold coins at the last minute, you are still looking for signs
that systemic transition is imminent. So what you want to look for are signs
that big money is panicking, not the signs that you think will cause
big money to panic. Because chances are that the really big money will see
those signs before you do, and panic before you even know they are there.
Therefore, signs that you think should be making big money panic, when
it's not panicking, are probably the wrong signs. See?
In the comments section, it often seems like the Freegold
holy grail is to be able to predict the proximate cause, and therefore get
some advance warning, and therefore be the first to make a correct timing
call on Freegold, even if it's only by days. But if
you follow my reasoning, then it is most likely a waste of time trying to
gain some advance warning. The advance warning is in the logic, and in the
A/FOA archives. And the holy grail is simply buying physical gold now, before
it happens. That alone will make anyone look like a genius in hindsight.
Some people look for rising short term interest rates as a sign of systemic
stress, while others look for rates to fall to zero or below. Some look for a
falling DX while others look for a spike. That's all monetary plane stuff,
and not where the rubber truly meets the road. As I said, the Fed is trying
to levitate short term rates right now, so why would rising rates indicate
stress? To me they indicate that the Fed has sufficient control over the
monetary plane, which I kind of assumed it did. What it has no
control over is where the monetary plane intersects the physical plane.
"So my question is really this, until we see
the $ drop rapidly on the FX market don't we know that official support from
someone besides the USG is still in full effect. And the corollary that FG
will not be imminent until this support is withdrawn, which we would see
immediately in the FX market as a $ devaluation?"
We
could see a sudden drop in the USD versus other currencies in the FX market,
or we could see a spike. But I think we will eventually see
some sudden, unexpected and highly unusual volatility. That's what I would
watch for if you're one who likes to watch the pot, waiting for the water to
boil. Watch for unusual and extreme volatility, because that should be what
we see when the monetary plane comes unhinged from the physical plane. And
don't forget the concept that there can be a head-fake right before a phase
transition, a sudden and major move in an unexpected direction.
For me, I already have the advance warning in the logic and the A/FOA
archives. I try not to watch the pot, but instead to explain the logic to
others, because I think that's better than trying to predict how the monetary
plane markets will behave at that moment when the physical plane lets go.
Sincerely,
FOFOA
Hi FOFOA,
Hope all is well!
Do you have an opinion of the latest strange GLD inventory update behaviour?
Could it be a sign of rumblings further down in the machine room? Or do you
really think it's all just meaningless pot watching? :)
/BF
Hello BF,
I certainly think it is interesting, but the short-term variations we see
don't change my opinion of what is happening behind the scenes. I think the
consistent drain this year is a sign of rumblings further down in the machine
room, but I find it hard to believe that the reporting anomalies are
reverberations from the same thing that is causing the drain. More likely, I
think, there is probably some explanation for the reporting anomalies that we
just don't know about, something that we haven't even considered.
The indisputable story is that GLD has lost 36% of its inventory, 487 tonnes in 10 ½ months. Title to that gold was transferred
to someone. The only question that matters is whether it was transferred into
BB reserves (the plenitude view) or into private ownership (my view, and obviously the correct view ;). That's more than
46 tonnes per month.
The BBs probably have at least twice that much coming in through mining and
scrap (just a guess), so let's imagine they have 100 tonnes
coming in each month. The outflow is obviously higher than the inflow, but
the pressure is widely distributed across the LBMA. So the rumblings in the
machine room are widely distributed and therefore isolated from what we see
in the reservoir drain reporting. GLD is where the buck stops, where they
obtain that shortfall of incoming gold, but it is not likely going to a
specific buyer. More likely, it is simply restocking the subterranean stream.
The point is, I wouldn't expect the underlying cause
of the drain to transfer "short term vibrations" into the daily
reporting of the drain, I only expect it to show up in the greater trend.
Therefore I think it is more likely that there must be a more mundane explanation
for the reporting anomalies that we see, something we simply don't know about
and therefore haven't even considered. That's the way I apply Occam's razor
to a situation like this.
I expect the short-term machinations of the system to appear outwardly normal
right up until the moment the pistons seize up and the whole machine comes to
a grinding halt. That's the way these things usually seem to end. So I expect
that could happen at any moment, without visible warning signs. In hindsight,
I think we'll realize that OBA was right, it was
just a hair's breadth away. But watching the pot can make even a hair's
breadth feel like an eternity from the watcher's perspective.
So yes, it's interesting, but Occam's razor tells me that we are most likely
watching the effects of some mundane cause we are not aware of while
"superstitiously" trying to attribute those effects to the greater
cause which is clearly obvious in the long-term trend. That's fine, and it is
human nature to do so, but at what cost? The cost is that a hair's breadth
starts feeling like an eternity, and some people can't handle that feeling
and end up throwing in the towel.
Have you noticed how many people that have only been following my blog for a
year or so eventually start making emotion-based predictions that Freegold must be 5, 10, or 20 years away? I have been at
this for more than five years, and I still have the same view I had in 2008,
that it could happen at any moment and each moment that passes brings us one
moment closer. In fact, I think it must be almost here right now! And I think
the reason I am able to maintain that view is that I have never been a pot
watcher. I have always paid more attention to FOA's logic and the long-term
trend than to the short-term vibrations.
The long-term trend is that the commodity bull/dollar bear market ended more
than a year ago, even though dollar inflation *policy* is firmly in
place. Shortly after that, the GLD drain began. And shortly after that,
support for "foreign dollar settlement with CB storage" reversed
and began declining. This is very close to what FOA said in one of his last
posts: "The game is to let the US economy suffer from its own bloated
expansion by moving slowly away from supporting foreign dollar settlement
with CB storage. This is more than enough to end the dollar's timeline as we
are already stretched to the leverage limit. They know that [the Fed] has but
one policy to use and that will be super printing."
Anyway, keep up the great work with your auto-pot-watching app! I do enjoy
the short-term show, even if I don't put much stock in it. ;D
Sincerely,
FOFOA
