|
For the FOFOA noobs, I'm talking about a >>personal "hedge
fund"<<, as in physical gold in your own physical possession. Not
a monthly paper statement that comes in the mail saying "John Doe owns x
shares in the Acme Gold Hedge Fund in New Haven, Ct." I just wanted to
clarify this right at the top because this is a long post and I know some of
you will give up once you realize there aren't any more cool pictures. Also
for the uninitiated, length and repetition on this blog are completely
intentional.
Onward...
hedge vb hedged; hedging vt (14c) 1: to enclose or protect : encircle 2: to
protect oneself from losing by a counterbalancing transaction (a bet) 3: to
evade the risk of commitment esp. by leaving open a way of retreat 4: to
protect oneself financially: as - a: to buy or sell commodity futures as a
protection against loss due to price fluctuation - b: to minimize the risk of
a bet
hedge fund n (1967) : an investing group usu. in the form of a limited
partnership that employs speculative techniques in the hope of obtaining
large capital gains
hedge hog n (15c) : an Old World, spiny, well fortified mammal
The dollar is the most fundamental of all markets because of the size
and desire for a means of diversification.
All you need to do is to keep a weekly record of what China is spending on
energy and materials to know dollar diversification is a simple business
tactic for nations lacking debt.
-Jim Sinclair (today)
Our whole paradigm is about to change. It will feel like a tidal wave when it
finally hits, and it will not be slow and measured. Literally everything
today is completely unsustainable and one day soon, just when you least
expect it, the marketplace will rise up and suddenly sieze reality. Prepare
now because when the wave rises it will be too late for preparations.
The Dying Dollar
Today's dying dollar, in all of its incarnations, is a mind boggling web of
contradictions. Massively inconsistent demands push and pull on an aged and
crippled debt system. Inside versus outside the US are vastly different in
their needs from the dollar. Wall Street versus Main Street require opposing
strategies. Even the needs of the US Treasury and the Fed are not aligned.
Push pull, tug of war, this is the life of a dying currency.
In its younger years the dollar had a wide berth in which to find its place,
plenty of wiggle-room, a large margin for error. And yes, many errors
occured, testing the limits of that margin several times along the way. This
dollar is not a senior citizen that lived an easy life.
But today there is no more wiggle-room. Every error has the potential for
instant death. And every crisis today requires the most extreme measures
imaginable, both overt and covert, just to keep blood circulating in the
patient for one more round of chemotherapy.
Debt
Truly, debt is the very essence of the dollar. The whole game has become
"we must hold every debtor to his debts, in real terms, denominated in a
dollar that can be expanded with ease." What a contradiction. What a
hipocrisy. Every debtor but the biggest of them all, the dollar's own
creator.
The dollar desperately needs a much higher gold price, denominated in
dollars. It needs this so that the debt of the world CAN be serviced in real
terms. It needs a very high priced gold so that it can service its own debts,
with credibility. Shipping large weights of gold at low prices is not a
sustainable activity for anyone. And these days, everyone seems to want the
physical stuff rather than empty promises.
But for the financial industry that has sold forward into the low price of
gold this would be catastrophic. And the dollar must save Wall Street in order
to save the debt which is its very essence. So there will ultimately be a
break between the Wall Street pricing of gold and the price paid for the
physical stuff that everyone seems to want. This is inevitable, unavoidable.
Pretend and Extend
The how and why of gold suppression over the past 22-30 years is only one
small piece of the pie that makes up the endgame of the dollar's timeline.
One very small piece, albeit a key one for those who hope to sail through
shifting paradigms, and of course a very important one to us physical gold
advocates. But just like today's web of contradictions, the dollar's long
path to its own end was a hodgepodge of contradictory missteps, fraud and
false signals, some done for personal gain and other's with sincere intentions.
Here is another piece of the pie, presented only to add scope and perspective
to our limited focus on gold:
...as far back as 1993, Fannie and Freddie were buying risky subprime
and Alt-A loans, but routinely misrepresenting them as prime... I warned in
the 1980s that government involvement in the housing market would inevitably
produce catastrophe. Even Republicans attacked me as an enemy of home
ownership.
-Fannie, Freddie, Fraud
The point is, that the dollar has been going to one extraordinary length
after another, for decades now, in order to extent its timeline just a little
bit farther. Talk about near-death experiences; there was 1970, 1980, 1990,
2000 and then today. And trust me when I say the dollar does not have nine
lives.
But don't be too impressed with the dollar's talent for survival. None of
these sequences of events requires a mastermind theory to explain it in the
simplest way. It was a structural advantage that was built into the Bretton
Woods system that gave the dollar its advantage that has carried it all the
way to the present. An advantage that was plundered for profit along the way,
but one that has always had a definite timeline, an inevitable end.
Hard Currency
The dollar's secret during the Bretton Woods years was that internationally
it was considered to be as good as gold. Foreign businessmen, bankers and
even central bankers held dollars as a hedge against their own currency.
Holding dollars was just like holding gold, since the price of gold in
dollars was fixed at $35. So as their own local currency devalued against a
basket of consumer goods, their hedge, the dollar, took up the slack.
This international demand for dollars in turn kept the dollar strong and kept
price inflation on the home turf of the dollar in check. As long as foreign
economies were experiencing price inflation faster than the US, their
products would be relatively cheap inside the US, masking the massive
monetary inflation of the dollar.
And then, surprisingly, this masking effect accelerated after 1971, after
gold backing was removed from the dollar. The world was now on a floating
exchange rate system whereby every central banker in the world had to
inflate just to keep up with the dollar if they wanted to seem economically
competitive in international trade. This local inflation kept international
goods ever competitive within the dollar's own currency zone and continued to
conceal the dollar currency inflation that was underway, at least in the US
it did.
Of course there was price inflation for everyone during the 1970's. But as
the reserve currency of the world and the transactional currency for
international gold and oil, the dollar's true printing volume was hidden well
within a volatile global supply and demand dynamic.
And ever since the 1970's the US has enjoyed relatively falling prices of
foreign-made goods. From French wine to German cars, to Italian leather, to
Asian pianos, Korean TV's and cell phones, Chinese furniture, Japanese
personal computers, even Arabian oil... the list goes on and on. Goods made
overseas for American consumption have been relatively falling in price for
Americans for decades due to the masking effect of true US monetary
inflation. Meanwhile these laboring currency zones experienced higher price
inflation than the US! What an illusion! What a contradiction!
The amount of dollars and dollar denominated paper assets that exist today
has no correlation to the real US economy or its ability to trade goods in
exchange for those dollars at current prices. This reality will soon wash
over the world like a tidal wave.
Hedging
According to Wikipedia the first hedge fund was created in 1949 when Alfred
W. Jones formulated a method for going long certain securities while shorting
others in order to neutralize the risk of movements in the overall market. He
was balancing his exposure to uncontrollable but inevitable cycles.
Today, the big money is all hedged. Almost no one with a sizable account holds
only long position bets. The market isn't balanced by 50% betting on one side
and 50% betting on the other. It is balanced within each portfolio through
leveraged hedges. And it is the evolution of these hedging instruments that
has both extended the life of the dollar like a steroid injection and at the
same time, sealed its fate.
During Bretton Woods, foreigners held "good as gold" dollars,
"the hard currency", as a hedge against their local currency risks.
But once those paper gold derivatives we like to call FRNs grew too numerous,
all bets were canceled, conversion denied, and those who still held the paper
lost out in the immediate devaluation. The same thing happened 38 years
earlier... and the same thing is happening 38 years later!
In the 1970's the liberated physical gold market proved to be an excellent
hedge against both currency and default risk. Then in the 1980's we were
treated to an amazing growth spurt in electronic exchange traded futures and
new global exchanges trading these derivative hedges, ultimately netting more
than 90 different futures and futures options exchanges worldwide.
In the early 90's, the dollar saw its match as the Euro was taking shape. To
counter this threat it promoted derivative hedges as a way of insuring dollar
dominance. These hedges, including gold derivatives, only served to leverage
the entire dollar system beyond its ability to serve as a real fiat money
system. The whole dollar landscape become just a trading asset arena,
evolving away from any meaningful currency use to trade for real goods. It
can head in no other direction now because our local economy, the US economic
base, cannot possibly service even a tiny fraction of the purchasing power
currently held in dollars worldwide.
We are now at the "end time run" in fiat dollar production that
will soon crush all hedging vehicles. One item alone, physical gold, because
it is the main wealth asset behind the next currency system (see: Central
Banks), will outrun everything by a wide margin. No matter the derivative's
hold on it! Just like gold to the pre-'71 dollar, paper and physical will
soon blast off in opposite directions.
Paper Promise Hedges
The purpose of modern paper hedging instruments is no longer to simply
balance a portfolio with opposing bets, but it has instead evolved into a
risk dispersion game. Like an insurance company, the writers of these
instruments issue highly leveraged promises of protection from the risks
inherent (and inevitable) in an unstable and unsustainable system.
The two main risks that are hedged today are default and currency risk. The
primary instruments for hedging these risks are credit default swaps (CDS)
for the former and interest rate swaps (IRS) for the latter. But the sheer
number of promises that have been issued (for a fee) has become so large that
it has now become the market driving force.
Think about this. The hedges are now guiding the markets. What do you think
will happen when they all of a sudden fail to function? The financial world
today turns on dollar assets that are all hedged, not just pure bare
holdings! Block the hedge markets from performing and the dollar itself is
unseated.
Today's Fed policy of saving Wall Street at all costs is in direct opposition
to the risk transferring dynamic of derivatives that has kept the dollar
alive. Contradictory forces! Of course the alternative would have been almost
as devastating, but that's the problem with Catch-22's.
The dollar's structural support system, its very skeleton, its integrated
hedging operation has failed. It is no longer a matter of time, it is only a
matter of recognition.
Please read the following story about Harvard University's experience with
derivatives, and note the key players who were true believers in this
structural system as they led their own institution down this poisoned path.
I realize it is long, but I have provided an excerpted, abbreviated version.
Harvard Swaps Are
So Toxic Even Summers Won't Explain
Excerpts:
Harvard was so strapped for cash that it asked Massachusetts for fast-track
approval to borrow $2.5 billion. Almost $500 million was used within days to
exit agreements known as interest-rate swaps.
Harvard panicked, paying a penalty to get out of the swaps at the worst
possible time. While the university’s misfortunes were repeated across
the country last year, with nonprofits, municipalities and school districts
spending billions of dollars on money-losing swaps, Harvard’s losses
dwarfed those of other borrowers.
Borrowers use swaps to match the type of interest rates on their debt with
the rates on their income, which can help reduce borrowing costs. Lenders and
speculators use swaps to profit from changes in the direction of interest rates.
A bet on higher rates, for example, means paying fixed rates and receiving
variable. At Harvard, nobody anticipated some interest rates going to zero,
making the university’s financing a speculative disaster. [Note that
they were "betting" on something controlled by Central Bankers, not
by market forces]
Harvard’s failed bet helped plunge the school into a liquidity crisis
in late 2008. Concerned that its losses might worsen, the school borrowed
money to terminate the swaps at the nadir of their value, only to see the
market for such agreements begin to recover weeks later.
Harvard would have avoided paying the costs of its swap obligations by
waiting. Its banks, including JPMorgan Chase & Co., headed by James
Dimon, were demanding cash collateral payments -- ultimately totaling almost
$1 billion -- that Harvard in 2004 had agreed to pay if the value of the
swaps fell. At least $1.8 billion of the swaps the school held were with
JPMorgan, said a person familiar with the agreements. Dimon, a 1982 Harvard
Business School alumnus, declined to comment.
Summers became [Harvard] president in July 2001, after serving as U.S.
Treasury Secretary. He earned a Ph.D. in economics from Harvard,
and became a tenured professor there at age 28. He served from 1991 to 1993
as chief economist at the World Bank, which initiated the first interest-rate
swap with IBM in 1981. As president and as a member of the Harvard Corp., Summers
approved the decision to use the swaps. Summers, who left Harvard in
2006, declined to comment.
When the plan was made public in 2005, Harvard’s financial team had
been busy for more than a year behind the scenes, devising a financing
strategy for the project using interest-rate swaps. These derivatives
enable borrowers to exchange their periodic interest payments. They typically
involve the exchange of variable-rate payments on a set amount of money for
another borrower’s fixed-rate payments.
The agreements were so-called forward swaps, providing a fixed rate before
the bonds were actually sold. Harvard was betting in 2004 that interest
rates would rise by the time it needed to borrow.
While the university could have paid banks for options on the borrowing
rates, the swaps required no money up front.
“There have been lots of forward swaps, but out longer than three years
is relatively rare,” Shapiro said in a telephone interview. That
duration increases the risk, because the longer the term of the contract,
the more volatile the value of the swap, he said.
Corporations might use derivatives to lower their borrowing costs as
many as four years before a bond sale, according to bankers who sell
derivatives. Anadarko Petroleum Corp. used the swap market in December
2008 and January 2009 to secure rates for $3 billion it plans to refinance in
October 2011 and October 2012
Other members of Harvard Corp. in 2004 and 2005, who served with Summers and
Rothenberg, were former U.S. Treasury Secretary Robert Rubin, Summers’s
previous boss and predecessor at the U.S. Treasury, who was an instrumental
supporter of his bid for the Harvard presidency
All except Rothenberg declined to comment or didn't return telephone
calls.
Harvard University’s finance staff worked with JPMorgan to develop the
size and the length of the forward-swap agreements.
For more than 20 years, investment banks such as Goldman Sachs Group Inc.,
JPMorgan, and Citigroup Inc., all based in New York, have been selling swaps
as a way for schools, towns and nonprofits to reduce interest costs and
protect against rising interest payments on variable-rate debt. The swap
agreements can be terminated if either the bank or the issuer is willing
to pay a fee, which varies with interest rates.
“Swaps have become widely accepted by the rating agencies [Think
of them as an "FDIC sticker"] as an appropriate financial
tool,” according to a slide entitled “Swaps Can Be
Beneficial” that was used in a 2007 Citigroup presentation to the
Florida Government Finance Officers Association. Debt issuers can
“easily unwind the swap for a market-based termination
payment/receipt,” the slide said.
‘Rapid Meltdown’
The problem resulted from the rapid meltdown in the markets, which culminated
in November when short-term interest rates and swaps rates collapsed.”
After credit markets seized up in 2007, central banks worldwide pushed
some bank lending rates to zero in their effort to rescue the financial
system.
‘Structural Problem’
Harvard not only lost money on the swaps last year. The value of its
endowment tumbled a record 30 percent to $26 billion from its peak of $36.9
billion in June 2008, and its cash account lost $1.8 billion, according to
Harvard’s most recent annual report. [They lost $11 billion in a
year... that's some fancy Ivy League PhD hedging, eh?]
“They have a structural problem,” [Is he talking about the entire
dollar financial system?] Lewis said in a telephone interview.
“There’s something systemically wrong with [the dollar?] Harvard
Corp. It’s too small, too secretive, too closed and not supported by
enough eyeballs looking at the risks they are taking.” [Who's that? The
Fed you say?]
By June 2005, the value of the swaps tied to Harvard’s debt was negative
$460.8 million, meaning that’s how much it would have to pay the banks
to terminate the agreements, according to the school’s annual report
that year. [This was one freakin' year after the swaps were created!]
By 2008, Harvard had 19 swap contracts on $3.5 billion of debt with JPMorgan,
Goldman Sachs, New York-based Morgan Stanley, and Charlotte, North
Carolina-based Bank of America Corp., including the swaps for Allston,
according to a bond- ratings report by Standard & Poor’s released
on Jan. 18, 2008.
Financial Burden
The swaps became a financial burden [That is, the dollar's support
structure became a burden...] last year as their value fell and collateral
postings rose. In a contract with Goldman Sachs, the school agreed to post
cash if the swaps’ value fell below $5 million, according to a copy
obtained by Bloomberg News. The collateral postings with the banks approached
$1 billion late last year as central banks slashed their target rates,
according to people familiar with the situation.
The value of Harvard’s swaps plunged and its need for cash soared.
Under contracts signed in 2004, Harvard had to post larger and larger
amounts of collateral to cover the negative value of the swaps; the total
amount would approach $1 billion.
Tumbling Index
On Nov. 13, the index used to value the agreements, the U.S. dollar 30-year
swap rate, closed at 4.247 percent. By the time Harvard held its bond sale
Dec. 8, the swap index had tumbled to 2.7575 percent. Harvard exited three of
its swaps tied to $431 million debt on Dec. 9, when the benchmark fell again
to 2.6885 percent. The interest-rate swap market reached a record low of 2.363
percent on Dec. 18.
Harvard’s decision to borrow money came at a time when the difference,
or spread, between yields on corporate and U.S. Treasury securities was the
widest since at least 1990, according to data from Barclays Plc. That meant
AAA-rated Harvard was selling bonds when the market was demanding the biggest
premium in at least 18 years.
Unwinding Swap
The school on Dec. 12 paid JPMorgan $34.5 million from the tax-exempt bond
proceeds to unwind a swap tied to $205.9 million of variable-rate bonds it
sold for capital projects, according to documents obtained from the
Massachusetts financing authority. It also paid Goldman Sachs $41.6 million
on Dec. 9 and $23.2 million on Dec. 11 to end agreements on another $226.8
million of existing debt. Harvard didn't disclose recipients of the other
termination payments because it paid them from the taxable bonds.
Stability, Safety
“In evaluating our liquidity position, we wanted to get ourselves some stability
and some safety,” he said in an Oct. 16 interview this year at
Harvard. “It was to take the losses now rather than run the risk of
having further losses if we continued to hold on to the positions.”
Opposing Regulation
Summers, along with Rubin and Greenspan opposed the U.S. Commodity Futures
Trading Commission’s attempt in 1998 to regulate so-called
over-the-counter derivatives, which included agreements like interest rate
swaps. At the time, Summers was Rubin’s deputy secretary.
Now Summers is leading the Obama administration’s effort to write
stricter rules for the derivatives market “to protect the American
people,” he said in October at a conference in New York sponsored by
The Economist magazine.
Harvard might have considered it a conservative step to lock in rates when
they were low, said Shapiro, the New Jersey- based swap adviser.
“You can be very big and very rich and very smart and still get
things wrong,” Shapiro said.
Please don't miss the point here. Harvard's story is not part of the cause
of the ongoing systemic collapse, but it is a visible symptom of the rot
which has permeated the dollar's structural skeleton. Today's dollar is so
brittle that it requires a hedging mega-structure so leveraged, so large, and
so unstable that it must... MUST collapse under its own weight. Some of it
will be replaced with titanium implants (monetized) in an effort to save the
banks, much like AIG was "rescued". Other parts will be dumped into
a market that wants nothing to do with them in an effort to extract pennies
on the dollar. Net effect -- dollar disintegration.
A fiat system cannot exist without a functioning counterweight, and today's
mountain of derivatives is failing at this task.
So where does gold
fit into all of this?
Well, the gold market is part of this massive derivative complex that is
currently counterbalancing and supporting the dollar.
Today, countless gold analysts around the world acknowledge that gold is a
manipulated item. While being on the right track, they are still using the
wrong perception to grasp the dynamics of these markets. This lack of
perception is what keeps them from positioning themselves and other gold
people correctly: positioned to gain wealth when a stake is finally
driven through the heart of this paper beast.
The efforts of most goldbugs are focused in one direction; to once again make
our paper gold markets reflect the true rarity and actual fundamental value
of physical gold bullion. I borrow a line from Mr. Moldbug to describe this
position: "They are aware that this system does not work at all, but
this does not lead them to question the entire tradition. Indeed, since their
mind exists inside that tradition, they interpret it as mere reality."
In other words, the chances of "gold to the moon" on the COMEX are
the same as the US government returning to a gold standard: exactly zero!
FOA: Lost in all the confusion is the distinction between investing in the
price of gold and investing in gold itself. Perhaps 90% of all the investing
in today's worldwide, dollar settled, gold market is done in this first way
mentioned. Yes, the market is structured contractually, to settle in gold.
However, in practice, in norm, and in past legal precedent, it is accepted
that paper gold trading is meant to only capture the price movements in gold
while ceding, what could be, controlling physical trades and their price
setting function to other market areas.
Obviously, this is the way it all started years ago, with the physical
trading and its fundamentals dominating the lesser paper trading. But the
market evolved with the paper contractual trading becoming 100 or more times
the size of the physical side. But everyone already knows all this, right?
What doesn't seem to be obvious is the "why for" the paper market
grew so large. It grew to dominate because world wide dollar expansion
reached its "non hedged" peak. In other words, the dollar's
timeline was ending as its ability to produce non price inflationary economic
gains came into sight.
In order to push dollar holdings further, international players needed and purchased
"paper financial hedges" to balance their risk. Within their total
mix of derivative hedges were found "paper gold price hedges";
modern gold derivatives. The important thing to remember is that these
positions are not and never will be used to demand physical gold. They
are held to buffer financial and currency risk associated with holding any
form of dollar based asset. To work, these items don't need to really perform
"dollar price movements" in the holders favor as much as they need
to be present in the portfolio to act as insurance stickers. In that
truth, these paper gold positions act like FDIC insurance at our banks.
While so many of our gold bulls salivate at the prospects of some player
calling for delivery and driving the gold derivatives market to the moon; it
ain't gonna happen! Our world of dollar based gold derivatives has grown so
large and become so integrated into supporting (hedging) international dollar
assets, the central banks will band together to crush any delivery drive.
This is in the ECBs interest as I will explain in a moment.
If some big player said he was going to take 100 million ozs out of the paper
gold market, the Central Bank systems would just order him to trade out for
liquidation only and go to the cash market to buy his gold. Don't think I'm
confusing Comex positions and their rules as being different from the rest of
the world gold market. What works on comex works everywhere when the system
is at risk. The controlling governments, who's domain Bullion Banks reside
in, would, could and will force those holders of bank busting positions to
simply cash out for the good of their system.
How many postulated, even just a few years ago, that with the fed expanding
the money supply by a year to date "one trillion"; that paper gold
could not reflect this inflation? This only further confirms that this form
of market "hedge" is failing to function for its owners.
Paper gold derivatives became a major force in allowing this last, end time
demand for dollars and subsequent surge in its value. This is why Another
said it would run way up, even while being inflated, before the end would
come.
The leverage today will be in a physical gold position, not any other
form of gold ownership. By accumulating physical gold today, we are truly
walking in the footsteps of giants; advancing with them as they work thru
this singular, long term political move.
You know, modern financial engineering incorporates all the physical factors
of "just in time delivery" management, and labels it "just in
time dispersion of risk". In other words: they try to take all
the perfect workings of a mechanical operation and replicate it into
financial dealings. But, financial instruments, while understood by us as
being paper bonds, stocks and bank accounts, are actually completely organic!
They are, like money, really just concepts of value we hold in our head; not
oil filters or fuel pumps we hold in our hands. The "worth" of
things is a "value" we mentally create thru countless interactions
with each other as we go thru the day: interactions we call "the
markets".
It's no accident of nature that our world monetary structure embraced
derivative expansion as it has over the last ten or twelve years. I think we
can say that this modern creation of risk management began around 1988 or so.
(It's funny, but I remember living in San Diego and reading a paper about a
gold company called Barrick that just started only a few years earlier?)
The record of derivative evolution meshes seamlessly with the recent need for
supportive dollar currency measures; a strategy of maintaining a failing
system that was ending earlier than expected. Truly, in 1990 no one was going
to carry the dollar any further, waiting on the endless delays of Euro
creation, without some way to hedge risk. We had hit the end of the dollar's
timeline too early; we had missed the mark.
The US could not physically save the dollar then, neither with gold backing
nor the production and sale of real goods. The only answer was to let the
dollar kill itself while you create an illusion of risk dispersion in the
form of derivative protection; a form of backing if you will. With
this "illusion of risk dispersion" in hand, called a derivative
hedge, the world currency system and its denominated assets, continued on. This
"just in time risk management" was and is adopted into every
present day currency that carried the dollar as reserve backing.
It's no wonder that Alan Greenspan has commented so often on the need to
control derivatives yet has no workable plan to counter their function. Truly
this dynamic was created to counter his
function and few can understand this! In effect, the dollar was placed on
a one way street that required it to be inflated into infinity. All as a
means of protecting dollar originators; the US banking system. Dollar
leverage, that is actually US liabilities, is now built up endlessly. This
all points to a nonstop, end time need for an uncontrollable inflationary
expansion by our fed.
In our first real test of "just in time risk management" our Fed is
and will provide buying power to gobble up any and all risk, "just in
time" and without end. It seems that when our "free market"
created assets are threatened to be exposed as an illusion of value,
Americans embrace any and every form of government socialistic bailout known
to man. Perhaps, our much exampled form of a "free market driven
economy" was little more than "free as long as derivative risk is
covered with social money"... "just in time".
Now, we will follow this trend in an accelerated fashion, until all
derivative process is exposed as nonfunctional outside a massive
hyperinflationary policy. Our wealth is and was nothing but an illusion of
safety and created in our own minds. Within this mix is contained all the
various gold derivatives we have come to love so well. The future failure of
a gold contract does not mean that the long holder gets his price or his
underlying good; it means his derivative fails to shelter his exposure by
matching his other loses. In terms closer to a gold bug's heart; paper gold
in any form will not match up anywhere near the price of free traded physical
gold.
We are on the road to high priced gold and under priced derivatives. The same
thrust will be apparent in all financial derivatives. Further, we are on the
road to a fully "cash settled" contract market for gold; here in
the US and abroad. In the time ahead, just before serious real price
inflation rears its head, look for most all dollar based contract commodities
markets to be restructured into pure "undeliverable" cash
settlement markets. Markets that, also, many gold producers will be forced to
use. The day of big
premiums on gold coins and bullion is coming and coming fast.
Implore your minds to hearken back to what is real and alive in our world.
While standing here among the mountains and trees, our financial perceptions
begin a change; recasting our thoughts of accounts and credits into hazy
feelings of virtual wealth we never really knew. Suddenly, bonds, stocks and
paper investments descend to lower levels of importance.
It was as true yesterday as it is today, and will again be so tomorrow; that
the touchable things in life are what make us whole as much as they make us
wealthy. Our bodies are real, so too is the earth and all upon it: is it such
an unreason that our wealth should not be real also?
For myself and many others that hear our message, the answer is no. No, it is
not unreasonable to clearly own and touch what our efforts in life have
brought us. I suspect that during this era, within this moment in time,
events will eventually define such logic more clearly and prove it to be
sound beyond any doubt.
Times change, my friends, history moves on and so too will mankind's
perception of wealth. Our perceptions will evolve, not in a forward matter,
but rather in an ages old oscillation that returns us back to saving wealth
itself; instead of a paper promise of wealth. With a regularity of seasons,
as sure as the phases of moons, a changing of "political will" is
once again about to redefine what our virtual written worth really is. In
response to these changes, often made with little more than the stroke of a
pen, mankind will seek a secure position. A position that will more so value
an ancient wealth: a golden savings that no politicians could ever write the
value of.
What "IS" firmly grasped by every major player in this market is:
-- If at any time a majority in the market were to attempt to use these paper
markets to extract a gross amount of physical product, the rules would not be
changed! Rather, the rules would be enforced and the players would be cashed
out and sent into the real physical markets to do their deals. Only then
would fundamental supply and demand, based on gross dollar liquidity, create a
"non virtual" real price for the product.
We wanted a free market and a free market is what we got: -- but it doesn't
move the virtual price toward the gold bull's favor. Now they are mad because
their bets are countered while physical gold advocates scoop up an almost
free metal: -- using the liquidity that dollar inflation is producing. Truly, if ever there was a way to
profit from gold mining, today, it's by buying this almost free physical gold
the mines are producing; while mine players and paper gamblers
pound their wealth into the dirt. This is what PGAs call benefiting from the
leverage in mining (smile).
In a convoluted stretch of reason, "virtual" gold bulls wanted
these markets to be regulated so the supply side of these paper creations
would pay off on their bets. The bulls wanted to be able to create all the
buying leverage they wanted while the bears would be locked into delivering a
metal who's total world amounts are fixed. The
bulls wanted free leverage without the using full amounts of real cash but
wanted the bears to mark to the market with real gold buying power for every
wager they made. If there is manipulation in our paper gold arena, it's in
this area of investor understanding. What these markets
"truly represent" is the misconception about gold in our time.
Western paper gold bulls fueled the creation of these markets by supplying
the demand for such gold vehicles and governments helped their currencies by
using these same as FDIC-like "insurance stickers" on their reserve
positions. They all wanted a place where they could bet on gold, using
maximum leverage, and not have to fully fund the physical delivery of bullion
if it came to that.
Somehow in the process, everyone was thinking they were doing an end run
around the slow thinking, stupid gold advocates the world over. Hoping that
coin and bullion buyers, who were creating the physical demand, would one day
feed the leveraged paper profits of paper players. Hoping that the rules
would be changed just enough so gold could be kept in a nice tight range.
We are seeing the results today of this fraud of a paper game as it comes to
an end. It's not nice to watch. Busting not only the dollar factions that
played this sector for their best interest, but also denying any profits to
the whole gold industry that chose to ignore the long term best interest of
gold's market value. The same industry that decided to cater to the singular
greed of a small group by sacrificing high gold prices so that leveraged
plays would work. In the process they played a political game to limit gold
prices from getting too high and will now suffer on the altar of a "gold
price without a range".
They can call the outcome anything they want: "bullion at a premium to
comex" or "comex at a discount to bullion". Either way the
whole system is destined to split and leave the paper players holding an
incredible bag as bullion runs away with the help of fundamental gold
factions in Europe.
Many of you are just now having that "a-ha" moment, when the light
bulb goes off and you finally realize just how the dollar is doomed and gold
will be set free. But then many of you "newly enlightened" ones say
"ahh, but this could take decades to unfold." What you don't
understand is that it isn't beginning now simply because your understanding
is. No, it began 40 years ago and more, and we are right now knee-deep in the
final end game.
More from Wikipedia: "As
the name implies, hedge funds often seek to hedge some of the risks inherent
in their investments using a variety of methods, most notably short selling
and derivatives. However, the term "hedge fund" has also come to be
applied to certain funds that do not hedge their investments, and in
particular to funds using "hedging" methods to increase rather than
reduce risk, with the expectation of increasing the return on their
investment.
Hedge funds are
typically open only to a limited range of professional or wealthy
investors."
But right now, for perhaps the first time in history, individuals can join
central bankers and the true Giants of the world by participating in
the ultimate hedge fund. One that, like modern hedge funds, focuses on the
hedge itself as the key investment with the most leverage, with the
expectation of life-changing returns. And the main differences between this
and traditional hedge funds are 1) much less risk, and 2) it is open to ALL
individuals, including you!
I'll leave you now with this poignant message from the Tower...
[article] ...Even in light of all of this shifting by central banks
into other currencies, the dollar still comprises 2/3 of global reserves and
attempts to shift away from the dollar would destroy the value of central
banks’ portfolios.
Randy's Comment:
Although I should be well used to it by now, it still amazes me every time I
see comments like the final remark here regarding any significant shift from
dollars will lead to the destruction of central banks’ portfolios.
It’s almost as if the commentator is trying to help indoctrinate a
paralyzing fear as a means to prevent any such attempt on the part of the
CBs, and to also create enough grass-roots doubt against such an attempt ever
being made that we the people won’t perceive any benefit in trying to front-run
with our own flight out of dollars and into gold...
It is an error in thought or judgement, however, to believe that a
“destruction” of the dollar portion of the portfolio would
therefore proportionately destroy the portfolio as a whole. That would only
be the case if all other things remained unchanged, but life seldom works out
so neatly as that. Sometimes an action can set forth an immediate chain
reaction that literally changes EVERYTHING you thought you knew about the
situation!...
In the world of the “new normal,” it is indeed possible (and
someday soon desirable) to let the fuse be lit and allow the CB store of
dollars be consumed. And to be sure, it is singularly the latent potential
energy of the gold component that allows us to make this analogy with gunpowder.
The natural chain reaction in the tiny open market for physical gold would
immediately bring to bear massive “heat” and
“pressure” upon its price… **POW** thus swelling the
“volume” of its value relative to all other things.
So even without radical changes to the quantity of physical holdings, a
simple expansion in golden value will more than compensate the average
portfolio of the central banks against the destruction of the dollar
component.
Still can’t wrap your head around it? Bear in mind that the gold
price is not a simple one-to-one inverse relationship with the dollar. There
is a great leverage lurking in there, but it has been largely masked
by the artificial abundance of paper gold which weighs down upon the equilibrium
price. And even so, since 2002 the dollar value has decline by just 20% on a
trade-weighted basis, whereas the gold price has responded with a 300% gain.
And the moreso that the public and private parties of the world rightly
gravitate toward physical gold instead of the illusion of paper derivative
gold as the solid foundation of their savings and diversifications, the
moreso you will see this price leverage grow in favor of larger multiples
of gold price gains against modest dollar losses....
Central bankers will increasingly prefer gold reserves over the paper
reserves created by other countries. Not only for the reasons of
reliability/trust as cited in this article, but moreso because in choosing
predominantly gold over foreign paper for central banking reserves will give
those various national monetary officials an improved degree of latitude in
their pursuit of an independent monetary policy.
WITH gold reserves, a central banker in a vibrant national economy can choose
to enjoy a strong currency relative to gold, but, importantly, it can still
alternatively choose to exercise loose monetary policy (for economic or
political reasons) in which its currency is made weak as measured relative to
gold. But regardless of choice for the relative strength or weakness of the
national currency, the abiding benefit of choosing gold reserves is the
superior stability — the systemic strength against procyclicality
— that gold offers to the asset side central banking balance sheet.
WITHOUT gold reserves, pursuit of a national currency policy that is
(according to their preference) generally strong OR generally weak is made
less expedient either way because the health of the central bank’s
balance sheet is subordinated to the quality of its foreign paper reserves
which are themselves subordinated to the particular monetary policies being
pursued by those foreign governments. Generally this structure of foreign
paper reserves offers only the option for national monetary weakness built
upon other international weaknesses, and worst of all it exposes the national
monetary balance sheet to procyclical systemic failure — a domino whose
fate is written largely in the hand of its neighbors.
When you understand how it is that it is economically (and therefore politically)
undesirable for other major currencies to appreciate against their peer
currencies (which is exactly what would happen to any currency replacing the
dollar’s reserve status), you will subsequently know why gold shall
continue to emerge as the de facto solution to the international reserve
question.
And here I emphasize de facto rather than de jure because this has become a
global phenomenon driven by a natural evolution (survival and ascent of the
fittest) and does not require any additional international treaty or enabling
legislation as a prerequisite or for motivation.
The breeze is fair and the road ahead is clear for the ascent of gold.
Sincerely,
FOFOA
FOFOA is A
Tribute to the Thoughts of Another and his Friend
Donations are most
appreciated, just click
here
| |