Euro Conversion

Hi, FOFOA,

There is one part of the gold trail that I have never fully understood. I do understand it conceptually, which is all that is really necessary, but it’s been bugging me for years. And now, it might not be that far away.

As we already clearly understand, paper gold markets tank, paper gold loses credibility, there is a rush for physical, and then there is no more physical available.

Next comes the part where I don’t completely understand the details. But conceptually it goes like this:

With no more physical available, there is a rush to exchange remaining dollar gold loans for euro gold loans which puts downward pressure on the dollar, upward pressure on the euro. The dollar exchange rate tanks. Hyperinflation here we come.

Perhaps you can enlighten me? And I’m sure your readers would find an FOFOA-style explanation of all this of value as well since it’s what’s coming right after gold goes into hiding.

Following are quotes from the trail regarding this. I have bolded certain parts and added some questions in red.

Solitary Monk

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FOA: Perhaps, "this new gold supply", it was for the purchase of "time".

If oil was about to go off the "dollar reserve standard" and allow pricing in all currencies, and "the physical gold currency" was to be the most economical way to purchase, then I would say, "time was a valued purchase", yes? It is in this "purchased time", the world finds the creation of a "new reserve currency". The dollar, is today, strong in nature of a low gold price. Tomorrow, it will be the Euro that will find strength in a low gold price! Perhaps, these dollar "gold loans" will be called in to become "Euro gold loans"? "Gold priced in the thousands of USDs does not change this currency, it changes your perception of wealth"

SM: What makes a gold loan a dollar gold loan or a euro gold loan? My understanding is that you are owed gold. So, where do dollars and euros come in? As best I can figure it out, it means nothing other than the jurisdiction in which the loan was made. If it was initiated within a euro country, it’s a euro gold loan. Otherwise, it’s a dollar gold loan.

Also, note the use of “will be called in.” It’s not entirely clear to me who is demanding what. As best I can figure out, the holder is demanding gold, and the counterparty, aided by the powers that be in the US at least are saying “No, you cannot have gold and, in fact, we are going to force you to take dollars.”

Hello SM,

Great question for a post!  "Will be called in" tells me that the lender is calling in the loan to force immediate repayment, or in the impossibility of repayment, perhaps restructuring the terms of repayment.  Yes, the loans were denominated in gold ounces, that is to say that one troy ounce of gold (XAU) was the unit of account.  But what was actually lent was dollars, and what must be paid back in extremis is dollars.  It is a basic principle that you cannot force repayment of a physical item, just like the tractor analogy with the shuttered tractor factory.  Suppose a mine is destroyed by collapse or landslide, or it simply goes bankrupt.  Which brings us to who most of these gold-denominated debtors were. 

It was mostly the mines. The second largest group was hedge funds. But most of these loans are closed out now, while they were very common when FOA wrote the above. Even so, I think this "euro conversion" is worth exploring because it may still be applicable to the LBMA paper gold market, at least to its European customers. ;D 

The loans were from the BBs to the mines and the hedgefunds, and, on a much smaller scale, to the gold fabricators and industrial users. But in order to resell these notes to the East and to Oil who like their physical, the CBs stood behind them with their gold leases to the BBs. That guarantee gave the paper the credibility it needed for buyers who actually wanted the physical from the mines. A lot of those CB leases have been unwound now as well, although some do remain on the books.  So those could certainly be restructured with euro as the ultimate payment instead of dollars. 

Imagine we have the collapse of the paper gold market and the BBs still owe X tonnes to the CBs. In extremis, they can only pay back those loans at the cash equivalent of the price of gold.  But they were the ones who set that price of gold in their now-failed paper gold market. Do you think they can get away with paying back the CBs at the defunct low price of $200/oz. now that their market has failed to deliver? 

I don't think so. I think the CBs would reestablish a physical-only market pretty quickly and that market would establish the cash price at which the BBs could retire their obligation to the CBs.  Meanwhile, the dollar would be collapsing which, in reality, means an extreme shortage of dollars.  No matter how many dollars the BBs could get a hold of, the FPOG (Freegold price of gold) would be outrunning them, making repayment impossible and restructure or default the only remaining options. And with their creditor being their new overlord, restructure becomes the only option if they want to keep operating. 

So how is this good for the euro and bad for the dollar?  Well, if you need dollars to buy something or service a debt, this is usage demand, and this adds strength to the dollar, no?  Think of poor countries with IMF loans, and the effect of having oil and other commodities priced in dollars. These are both dollar-positive, are they not? And so through conversion, dollar demand is reduced while supply remains, which will be dollar-negative and euro-positive as the outward flow of dollars (from the US) turns inward. 

This will also be good for the BBs, because euro will be in plentiful supply while dollars will be in short supply (which is the case when a currency is collapsing in value), and gold will be stable in euros while it is anything but stable in dollars.  And the UoA for the loans is gold ounces, so that means the amount owed will be stable in euro while it was previously skyrocketing in scarce dollars.  A win-win for everyone involved.  Well, almost everyone.  ;D

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One day soon, this "paper gold item" may lose it's "integrity from oil" by way of "competition" from a new reserve currency! In that day, "paper gold" will rush to become "physical gold" as "dollar gold contracts" rush to become "Euro gold contracts". You see, the value of the gold lost from the Euro CB sales will return in the form of a "Euro strong in gold". The "gold reserves" held for the EURO will offer strength, but it will be the total destruction of the dollar gold market that does make " this currency go home"!

I assume, but don’t know for sure, that “paper gold” means unallocated gold, and “gold contract” means a gold loan and a right to future delivery.

This paragraph seems to imply that this will lead to dollar spending in the US, but the mechanism isn’t clear to me.

I think that "integrity from oil" means that the GOR (gold oil ratio) will depart its 67-year range (of between 9 and 29) in dramatic fashion.  If we look back over 67 years, "paper gold" was simply dollars before 1971 and today it's mostly LBMA unallocated gold-ounce-denominated accounts.  And it is the convertability of this "paper gold" that has kept the GOR in its range. 

With convertibility gone, "this "paper gold item" may lose it's "integrity from oil" by way of "competition" from a new reserve currency [that offers the reestablishment of credible convertibility]."  Does that first sentence make more sense now? 

"In that day, "paper gold" will rush to become "physical gold"..."  This part is pretty self-explanatory.

"...as "dollar gold contracts" rush to become "Euro gold contracts"."  Just like I said above, if you are either party (creditor or debtor), you would rather have your loan payable in extremis in a stable, knowable amount than a crazily rising, impossible to achieve amount, no? 

And, once again, all of these dollar-denominated trading accounts outside of the US do require actual Realdollars (US base money, either cash or liabilities tied directly to the Fed or through a US bank with an account at the Fed) for clearing, even if not for every single transaction.  This principle lends strength to the flow that can be described as Realdollars heading outward from the US while real goods and services head inward, aka the trade deficit.  So the conversion of this need for dollars to, instead, a need for euros for clearing, will contribute to the reversal of that flow I just described. 

Think of every transaction as one side being the traded commodity and the other side being the money.  Even in currency trading, one currency is the traded commodity and the other is the money.  Today, the USD is the "money" (or the denominator) in most of the global markets.  This requires real US dollars for clearing.  So imagine the simple change of using a different money, and what impact that change will have on the flow I described above.  It will make the current glut of homeless dollars want to "go home" as FOA said.

Here's a short paragraph I found in a tutorial that explains how the dollar is the main axis of most transactions today. This adds demand for dollars everywhere in the world:

In EUR-USD, the first currency which is Euro is the commodity and the second currency which is USD is the money. When you buy EUR-USD, in fact you pay USD to buy Euro. No matter in what currency your forex trading account is. You can have a trading account in USD, GBP, CAD or any other currency. When you want to buy EUR-USD, your broker changes your trading account capital into USD and then pays that USD to buy Euro. This is how it works. Any trade in forex market has to be done through USD. US dollar is the main currency and is the axis of all transactions in the forex market. Any currency pair that you buy or sell has to be done through USD. However, all of these process will be done automatically and you just need to click on the buy or sell buttons.

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Initially, they built the Euro with little talk of gold, all the while building a paper gold market that is dollar settlement based. By increasing the Gold Trading Market with paper gold, it not only drove the gold price down, but gave these contracts credibility as they could be settled in a strong dollar via gold. The hook came when they suddenly wanted gold as part of the reserves for the Euro! Now the BIS just stops supporting the London market with Central Bank gold loans and sales. By the time for the Euro to debut , gold starts to rise through the $360 area, there by breaking the entire dollar based paper gold market! Every oil state, and anyone else that is holding paper gold, will try to first exchange it for physical. After that guess who will be waiting with a brand new hard world reserve currency, ready made for converting dollar gold loans into Euro gold loans!

So, it sounds as if the euro block will facilitate / encourage this conversion. Just trying to be helpful?

Yes, it does sound like that's the plan!  Helpful?  Sure!  Why not?  To me, being "strong in gold" means being relatively stable in gold such that physical redemption/convertibility is possible anywhere, at any time, by anyone.  And, once again, most of these "dollar gold loans" are already closed out.  So now I'm thinking more about the massive amount of paper gold, backed by complex derivatives held by the BBs. 

Let's look at that last sentence a different way:

After that guess who will be waiting with a brand new hard world reserve currency, ready made for converting dollar gold liabilities/credits into Euro gold liabilities/credits!

As the paper gold market fails, the derivatives backing the BB's gold-ounce-denominated liabilities will fail to be able to bring in (buy) the metal required for redemption. Say the paper market stops trading at $250 per ounce.  There will be ounce-denominated liabilities that still exist, and they can now be settled for $250 instead of a real ounce because, like I said, in extremis you cannot force repayment of a physical item.  But will they all be closed out in exchange for USD250?  Perhaps not. 

Here's a better alternative for everyone involved.  Remember that if repayment becomes impossible, then the alternatives are restructuring or default.  And if the banks want to keep operating in the new system, restructuring becomes the only option.  So, even as the paper market dies at $250 per ounce, the real price of physical gold will be much higher, and the operators of the new system know this.  So perhaps they would rather not let the BBs cash everyone in a currency that gold is running away from when they could be cashed out in a currency that is "strong" (stable) in physical gold. 

The new gold price in dollar terms will be soaring as the USG is printing like mad, but the euro price for an ounce will be stable.  So even in the time it takes to cash everyone out in dollars, the amount of real gold each cashed-out customer could buy on the physical market is diminishing quickly. That's what happens when a currency collapses/hyperinflates.  On the other hand, you could lock in everyone's physical Freegold purchasing power on a moment's notice by converting all of those USD250 liabilities into EUR liabilities at the going exchange rate of that moment. 

Think of it like this:  The moment the paper market stops trading, physical gold is now $55,000 and you have 220 "ounces" in your BB trading account.  Each of those "ounces" is only worth $250 now.  If you could get that cash fast enough, you could buy one single ounce on the new physical market. But it takes time for them to cash everyone out and for everyone to go buy that physical. And during that time, the dollar is collapsing.  So your physical gold-denominated purchasing power is going to decline rapidly from a single ounce, to 3/4 of an ounce, to half an ounce and so on. 

If, on the other hand, the BIS/ECB and the BBs agreed to do the euro conversion, there would be no rush. You (as a BB customer) would still only get a single ounce of physical for your 220 "ounces" of BB credits, but at least you would now be locked into that full ounce and the BBs could cash everyone out at a more leisurely pace since I'm sure there will be plenty more pressing concerns at that moment. 

How could this conversion be facilitated by the ECB?  Easy!  Print the new euro for the banks in exchange for their derivative "assets" which are mostly dollar-denominated. The next step, I guess, would be to unwind and liquidate the derivatives.  The banks are getting a great deal here, so the ECB could easily instruct them to liquidate them on behalf of the ECB and return the proceeds in EUR. This would put further downward pressure on the dollar and upward pressure on the euro. 

Of course there would be some loss and the result would be a net-increase in euro base money.  But the ECB could easily mop that up with a small sale of Eurosystem gold.  Like I said, I have no idea what the actual stock of these BB ounce-denominated credits is, but let's say it's 10,000 "tonnes".  Divide that by 220 and you get 45 tonnes, and let's say the derivative loss is 50% from the time of the euro conversion until liquidation.  Divide 45 tonnes by 2 and the Eurosystem would have to sell about 23 tonnes to mop up the extra euro that were created by the conversion. 

Today the Eurosystem has about 10,800 tonnes, so the cost of the conversion would be about 0.2% of its gold, wholly absorbed in real terms by the revaluation.

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Euro Zone based derivatives will be supported through limited gold delivery or with Euro cash. Both will be seen as a mountain of credibility in the storm that is coming. Let's face it, if you held a Euro gold contract for 100 ounces and only ten ounces plus Euro cash are delivered, that settlement will be worth a fortune in today's terms compared to a hyper dollar world.

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The modern financing tool we call the "gold carry trade" is now becoming the poison that will kill this market. The demands of gold lenders to return their "at risk" positions are creating an atmosphere where no amount of physical gold exists that can supply the outstanding paper claims. Great blocks of gold are now lent into the markets at 4% or greater, where once 1% was considered a good return. As each new group of lenders enter the market they are followed close behind by former lenders demanding their gold return. Fear begins to grip those who were once bullion owners as they now became paper pawns. Each new demand for "full allocation" creates yet further demands to borrow. The supply of new lenders grows smaller and smaller as the possibility of default increases.

The ECB moved to block any further erosion of the Euroland position. [This was written just after the Washington Agreement. I think that is what this refers to but I’m not sure.] Most certainly, all world gold contracts denominated in dollars [denominated in dollars???????????????] would have gravitated towards Euro conversion to best advantage the EMCB gold stocks. Indeed, in a brilliant move they have blocked that escape and doomed the dollar gold market to collapse from non delivery. The ECB can now effectively support its gold commitments thru either bullion allocation or Euro settlement. By marking to the market their gold reserves they will contrast the advantage of a dollar gold market collapse no matter what form it takes. Weather discounting of paper gold from non delivery as derivatives are sold in mass (plunging dollar gold price) or a complete run for delivery (what we are seeing now) that leaves 95% of the market shut down and still holding paper demands ( paper gold priced in the many thousands. prior to lock up), the Euro will gain reserve backing.

Yes, I'd say he was definitely referring to the WAG.  He's talking about a chain reaction where, as one paper gold holder (creditor to the BBs, remember, paper gold is a BB liability) demands allocation, the BBs have to borrow physical from someone else, creating a new paper gold holder.  The CBs were the ultimate "lender of last resort" in this chain until the WAG. 

I think I explained well enough above what he meant by "denominated in dollars".  In extremis, cash is paid.  But what cash?  Any cash?  No, I think it is probably legally limited to the "money" that priced the commodity that was bought, sold, lent or borrowed.  This is no problem as long as all the various currencies are stable and freely tradable, just like the tutorial I quoted above said:
 

Any currency pair that you buy or sell has to be done through USD. However, all of these process will be done automatically and you just need to click on the buy or sell buttons.

But in a crisis where the markets aren't functioning properly, this ease of exchange will break down. At that point, if you don't have the physical gold, you're better off being owed "gold-ounces" to be paid out in euros rather than than in dollars, because the euro will be in full supply and stable in gold while the dollar will be in short supply and rapidly declining in gold. 

Now when he says they "doomed the dollar gold market to collapse from non delivery" he's talking about cutting off the lender of last resort.  So the chain reaction will simply continue until there's no more gold to be allocated.  And then he says that by marking their gold reserves to market they positioned themselves for the collapse of the dollar gold market.  The collapse being from non delivery.  Once it collapses, its price is no longer real.  So at that very moment, because of the ECB's MTM rule, the ECB's price of gold will be the physical price, whatever they say it is, because they can make that market! 

He says, at this point, "The ECB can now effectively support its gold commitments thru either bullion allocation or Euro settlement."  Of course this happens at the new physical price, because that's now the price!  And any "dollar gold liabilities" can be converted to "euro gold liabilities" at the current exchange rate between the currencies at that time which will lock these liabilities back into gold in real terms.  Sure, they will have devalued, but they won't continue falling in real terms along with the dollar. 

And finally, when he says "the Euro will gain reserve backing", I think he's simply referring to the natural strength and stability the euro will have versus both the dollar and gold.  Yes, the euro will devalue against gold, but that's not really a devaluation of the euro.  It's simply a revaluation of the gold reserves, and that is another way in which the euro will gain reserve backing.  Its reserves will have been revalued. 

Additionally, as I mentioned above, the Eurosystem will probably sell some gold into the market as part of this euro conversion process, and that will put downward pressure on the (newly revalued) price of gold which will make the euro stronger in gold. 

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What of all the gold contracts being settled in Euros? You bet! And the DRAW here, is that the ECB marks its gold market to market with the process, later, extending to using "official" gold deals as the market price, not the paper LBMA. When push comes to shove, they will settle
Euroland gold notes at the official gold price, "in EUROS"! They can do this because their currency holds exchange reserves in gold that adds value as gold rises. The extra Euros printed to supply this demand will only fill the dollar void and be represented with gold reserves. When the dollar "paper" price starts it's "final" dive into the pits by discounting it's present credibility, it will drag every contract holder with it. This risk is real and will fuel the drive that demands a new Euroland physical marketplace.

Here he mentions the "official gold deals" that will be used to MTM gold once the paper gold market fails to deliver.  And I think the most important thing to keep in mind is that, when he talks about paper gold that was formerly traded in dollars being settled in euros or physical, he's talking about the new Freegold price.  If you had paper gold of any kind, you will still lose due to the revaluation.  But with the euro conversion you will not lose any more than the amount of the revaluation, whereas if you are (in the US?) holding dollar paper gold it could easily go to near zero by the time you are cashed out in dollars and try to buy some gold with those dollars. 

Perhaps the LBMA will fail to deliver on demand at $1,200, or $907 instead of $250, and that becomes the settlement price.  Say it happens at $1,200 and the revaluation takes it to $55K in real terms.  If you thought you had 46 ounces, you'll be cashed out at about 1 ounce.  So why would the ECB want to do this rather than letting all Euroland paper gold holders suffer the fate of the dollar?  Well, gold is to be an important part of the new system, yes?  Need I say more?

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This first run will be a benefit to Euroland as they will be called to cover the needs of many other nations that once depended on dollar based assets. But later, the world will have a reserve currency and gold to trade with and against each other. The Swiss must free up their gold by selling it for Euro reserves (in a round about way, I'm sure). In the end, weather they join the EMU or not, the ECB will eventually absorb most of the "need to sell gold" as stress becomes apparent. This settlement of many of the Euroland gold loans in Euros, will not in any way make gold less valuable. Indeed, it will keep gold liquid in the face of an initial "lock up" in contract settlement.

Perhaps this is why Euroland will facilitate conversion to euro gold loans?

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If you read my recent reply to Strad Master, then it should become apparent that William F. is not declaring war. Rather he is continuing a policy that will allow the US dollar to destroy itself. By inflating the paper gold markets into uselessness, the US has removed the only vehicle that added enough value to our dollar currency to keep oil prices in check. Now that the Euro is clearly separated from our dollar system and able to make good on its physical portion (convertible) of gold debt, we are off to the races. Oil will rise until one of the currency systems fail! With the weak nature of the US debt situation, real world price inflation will break the dollar economy first. It will also break the dollar gold system through physical demand. It will force a dollar cash settlement for failing gold banking contracts in place of physical delivery. This process will create a cascading default that literally shuts down all paper gold markets. In the meantime any perceived weakness in the Euro will be countered in a soaring physical gold price. This sudden strength in Euros will allow settlement of all optional (physical or non- physical) gold loans in Euro cash instead of dollar cash.

No question was included with this quote, so I'll just let it stand, except to remind you that this "optional" settlement in euros rather than dollars will be at the new Freegold price after converting  from gold to dollars at the crashed LBMA price, then from dollars to euros at the euro-dollar exchange rate at that time, then back to gold at the new Freegold price in euros. 

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Your position is based on current context. This drama will appear different as it unfolds. US inflation will be driving upward, its economy slowing and our Fed printing like mad. This very trend is currently on track as we and others have been pointing out. No one thought that Allan would embark on such a confidence killing rout and it is the bankruptcy of American financial policy that is driving this. The dollar is at the end of its timeline and our expansion of derivatives was but an effort to save the system for a while.

Let's see; you have a gold loan on the books, physical supply dries up forcing a premium on metal over contract gold, the contract and futures markets freeze up and your asset in the form of loan paper is worth zero. Then the ECB in conjunction with the Euro faction of the BIS offers to restate the now worthless gold loans into Euro denominations and you are going to walk? Where? To the US?

In this context, the next reserve system is saving a portion of assets that were already destroyed by US special interest. US policy destroyed before the fact as much as the US printing presses destroyed the dollar gold ratios in 71. Think again, my friend.

Again, no question came with this quote, so I'll just make a comment.  I think it is unlikely that the paper gold market will trade all the way to zero.  Trading will have to be halted at some point and cash settlment executed to wind it all down.  We obviously don't know when or at what price this will occur.  But there are three main exchange rates that will come into play here. 

The first is the $POG at which trading is halted.  The second is the EUR-USD exchange rate at the time of any euro conversion of Euroland-based claims.  And the third is the new Freegold (revalued) price of physical in euros.  We could play with various guesses here and see how you Eurolander paper gold players will fare versus the ones elsewhere who'll be left dangling with dollars.  But if we just use my back-of-the-envelope calculations above, you Europeans could get somewhere between 1/40th and 1/220th of what you thought you had, as opposed to getting close to zero.  Not so great either way, which is why it's best to stick with physical, even in Europe! ;D

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--Now--:
A process is in the works to change our dollar / gold relationship again, after derivatives were inflated beyond use. Now, even the price of gold can no longer be captured on a par basis between derivative gold paper and real physical gold as the preceived value of gold is soaring. Once a super currency inflation breeds super price inflation; the derivative markets will begin to fail their hedge purpose and their trading value. These asset themselves will become the real risk.

Dollar supporters have no choice but to "NET OUT" at even any derivative hedge that may risk the system. That is, "Net Out" in a way that completely voids their risk transferring purpose as they are settled in dollar cash "no matter what effect inflation is having on the currency's value or your other dollar assets! Remember, the financial world today turns on dollar assets that are hedged; not just pure bare holdings! Block the hedge markets from performing and the dollar itself is unseated.

Make no mistake, every official rule and regulation ever written for currency crisis management involves not only currency profile assets, but also gold profile assets. With this concept in grasp; it's easy to see, with gold derivatives so widely used in current dollar support functions today, why they will be impacted as part of the paper mass.

Modern derivative usage involves gold derivatives and a new evolving crisis policy management will function somewhat the same as in 1971. It will arrive as some "net out" policy directive and universally abrogate all gold delivery options as part of the package. Any gold derivative that is used to support dollar currency exchange rates will be reworked to implement cash settlement against all claims for international currency derivatives written for gold.

What is a “gold derivative that is used to support dollar currency exchange rates”? Any liability of a US bank, perhaps?

Further

Is it no wonder that Euro Banks have no fear from writing short gold paper. Because the entire Euro money profile is in the background for them. Running in parallel to and not in conjunction with the current dollar system. Any Fed policy that must break the risk transferring dynamic of derivatives, to protect our US banks, will open the door to the ECB's dumping IMF protocols and using the Euro alone as their sole reserve currency. This will immediately shift all dollar derivative plays onto the market, dynamically devaluing our dollar in the process. The ECB would then be cashing out holders of their gold loans in Euros as dollar physical gold prices spike and paper gold prices plunge.

I guess the "IMF protocols" must be at least part of the reason that dollars are the axis of most transactions today. So what he's saying is that if the Fed is forced to do anything that jeopardizes the hedging functionality of the derivative structure, the ECB will be forced to abandon this protocol and allow its banks to start using euros as the axis of transactions. And if this happens, then it would cause the unwinding and liquidation of all dollar derivatives as the banks frantically scramble to switch them to euros. As I already mentioned above, this would not only put downward pressure on the dollar, sending dollars "home", but it would do so "dynamically" as FOA so brilliantly put it.

Higher still; we climb

Of course, the big difference is that Euroland will encourage a physical only market price that, in turn, also floats Euro gold values to the sky. All in an well balanced effort to replace the massive dollar asset base it lost. In this; the Euro will become the first currency block that functions as a local reserve, yet under scores its image with huge non- monetary gold assets. Is it no wonder that EuroLand citizens will be buying gold as much for its prospects to rise as for its ability to be a wealth savings. In this it will hedge the future remains of a dollar failure and its impact on the world system.

Great paragraph!  I hope someone in particular is paying attention. ;D  

If Mr. Huge EuroLand bank owes the ECB system gold worth 100 million in current gold deals; [why does the bank owe these to the ECB system?] with each 1,000 euro rise in gold he finds himself able to settle in less received physical gold. In a true "cashed out" transition of currency reserve hedges, each ounce of contracted gold owed could be reduced many times. Every player in the gold system, that is caught with their pants down, will rush to be a part of any Euro workout. Indeed, for every major player that was long the gold loan system, for the purpose of buying gold, cash outs in Euros will offer the only return. Official players in the oil sector would eventually be receiving American gold (but that is Another story).

SM asked why the bank would owe gold to the ECB system.  This would be a bullion bank that had leased gold from one of the Eurosystem CBs.  As I mentioned earlier, there are probably less of these leases outstanding today than there were when FOA wrote that, but we can't know for sure since they removed the lease cap from the 2009 WAG renewal.

And here, in this last paragraph, he makes it clear that "any Euro workout," any "cashouts in Euros will offer the only return."  It won't be a great return, because you will have missed out on a once-in-a-thousand-years revaluation and the opportunity of a lifetime, but it will still be better than holding a "dollar gold contract" while the dollar circles the drain.  ;D

Sincerely,
FOFOA