Saturday, January 26, 2013

FOFCON Open Forum

From FOFCON2013 in fabulous Las Vegas, Nevada, welcome to the FOFCON Open Forum.

Above, you can see that Poopyjim, being the good stooge that he is, checked in on the World's Largest Ball of Twine during his roadtrip to FOFCON. It is, indeed, still there just waiting to be thrown.

It was a small and intimate gathering on purpose this time, so I'm sorry to anyone who feels left out. Maybe we can have a bigger meeting next time!

I'm sitting here with the group right now, so let's see if they have anything they want to say...

Aquilus says: RJ, you don't have a hair on your dixie ass if you don't come next time.

FoNoah says: I can't think under pressure.

Lisa says: This feels like Christmas.

Lisa's hubby says: Are we gonna do this next year?

Matrix Sentry says: Can I have another piece of cake.

Michael dV says: Gotta run, gettin up early to take the group shooting.

Poopyjim says: We freegolders are rollin' deep. We're takin' over this town.

Wendy says: Is there any more wine?

Woland says: If the transition happens this year this will be done in Monte Carlo next time.

Mrs. FOFOA says: What a lovely weekend.


Here are a few pictures from the extracurricular activities at FOFCON.

From the Hoover Dam, here's FoNoah, Poopyjim, Wendy and FOFOA (picture taken by Aquilus):

Another picture of the same group:

Aquilus showing his pictures to Wendy and FoNoah with Jim hanging back:

FoNoah and Aquilus:

Wendy gets a close look at Mike's big gun:

Wendy takes Mike's full auto sound suppressed MP5 for a test drive:

Poopyjim mows down the dreaded Happy Face:

Wednesday, January 16, 2013


From the comments under the last post, it seems that a few of you don't understand what I do. But that's OK with me. I don't need to be understood.

I think someone wrote "I'm not convinced." Ha! Good, I hope not for your own sake! That doesn't mean that I think my post was wrong, just that if you feel that way strongly enough to post a comment about your own state of mind then you might want to check your expectations at the door. ;D

I can also tell from the amount of support that came in through email and Paypal that a lot of you do understand what I do and, more importantly, that you appreciated the significance of what I did in those three posts. But for the rest of you, I'll post this again and keep posting it as often as it is needed:

FOA: "I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future, grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light."

For the benefit of those who are still lugging around their preconceived notions, allow me to briefly clarify a few things. I do not know anything special. I do not do technical analysis. I do not provide any tradable information. I do not have any inside knowledge. I am not FOA. All I do is unwind the trail that he exposed a long time ago and then share my understanding with you for free. What you do with it after that is up to you. I do not give unsolicited advice nor do I put my opinions "out there" beyond the confines of my own space. If you are reading what I wrote, then you must have come to me, because I didn't approach you. So if you don't like what I do, then by all means please find something more useful to do with your time.

"Official Support" – Then and Now

There were also some great comments under the last post and a few good questions. I'd like to take a closer look at one of them in this post and, hopefully, kick off an interesting discussion. Max De Niro asked:

"How is that the ECB supports the paper gold market? Do they buy COMEX contracts, LBMA unallocated? Where would this show up on their balance sheet?"

Along the same lines, Tintin wrote:

"A quetion about possible ECB support for the paper gold market, or the withdraw of such: How do they do it? […] So you see, I am struggling with ECB support = higher POG or withdraw of ECB support = lower POG."

These good questions highlight an issue that I think is worthy of further discussion. So let's take a closer look at it.

I'm expecting a lower POG simply from the force of "gravity". In the post I proposed two legs of support for the paper gold market: 1.) the bull market in paper gold (private support), and 2.) official (CB) support. I said that "support" does not always mean a higher price (in the early- to mid-90s it did not), but that today, price levitation does reveal support coming from one (or both) of the two legs.

So the withdrawal of ECB support would simply let the "paper gold bull market" (private support) battle it out with gravity. It does not mean an immediate free fall in the POG (I presume "official support" is only occasional), but it means that if something goes wrong, like a general market decline, there might not be the "emergency support" that there was last time.

Think of it as two separate markets, physical gold and paper gold, which are presently attached to each other. Imagine that the physical gold market is like a beach ball being held underwater and that the paper gold market is like a lead weight also being held underwater. "Support" is simply whatever keeps them attached to each other. Most people think they are inseparable, just like most people think the dollar can't hyperinflate. In both cases it is "support" that is forestalling the inevitable.

Back in the 90s ANOTHER told us that when a CB sells gold, it is to a specific buyer, off market so as not to influence the price, but when a CB leases gold it is for a purpose, to buy "something" for the market. So what is the difference between a gold sale and a gold lease? I think the distinction is worth a closer look.

For one thing, if you want to buy some amount of spot or physical gold, normally you must have already accumulated surplus currency equal to the amount of gold that you want to buy (e.g., a Giant or just an everyday saver). Not so for a lease. To lease that same amount of gold you only need a business plan or an outlook that will yield more than the interest on the loan (e.g., a bullion bank, a mining company, a hedge fund or a gold fabricator). A lease is a two-legged deal. In essence, a lease is simultaneous spot and future transactions in opposite directions.

A CB that is leasing gold is taking a position that is essentially short spot gold and long future gold. Spot gold may occasionally mean physical, but not necessarily. This position "supports" the market (keeps the two markets attached) at times when the private market is running in the opposite direction—long spot gold and short future gold. This "running in the opposite direction" occasionally leads to the backwardation seen on the lease rate or GOFO charts because future gold loses its contango (its premium) over the spot gold price. It is similar to OBA's "rush to the Here 'n Now."

Now let's think about spot gold that is not physical gold. If it's not physical, then what is it? It is simply a non-interest bearing account denominated in gold ounces (or XAU) rather than dollars (USD) or euros (EUR). The equivalent of an interest bearing account in gold would be a lease, as long as the market is in contango. In other words, if you want to earn interest on your gold, you lend it out. You sell your spot gold, buy future gold at a slight premium (but you only have to pay a small deposit to lock in your future price), and then you use the rest of the proceeds from your sale to earn your interest in dollars from money markets or Treasuries.

The point is that interest comes from currency, not gold. Gold doesn't reproduce itself, it just sits there. You can't buy spot gold and come back a year later to find more gold. But Treasuries do, somehow, reproduce dollars. You can put in $X and come back a year later to find $X+n dollars waiting for you. To make money from gold you must sell it, buy it back later, and make money lending the currency during the time in between. Spot gold (XAU) accounts are the same. If you want to make money you must sell your spot gold (even if it's just a book entry) and buy it back at the future's price, earning interest with your currency in between.

Another way to look at the difference between borrowing and purchasing gold is that it only makes sense to borrow gold if you think the price is heading lower (or at least flatter than interest rates). If you borrow gold, you profit when the price falls. Buying gold, on the other hand, makes sense either A) if you think the price is heading higher (Western/shrimp view) or B) if you view gold as real wealth (Eastern/Giant view).

According to a World Gold Council (WGC) research paper back in 2000, the mining industry was the greatest user of lent gold, and central banks were by far the largest lender. According to the survey conducted for the paper, 90% of the gold on loan came from central banks. [1]

The mining industry was essentially borrowing XAU (spot gold) credits and paying them off with physical down the road. But they couldn't spend XAU—what they really wanted and needed was dollars. So the bullion bank would assist the miner in selling his borrowed "spot (paper) gold" into the "gold" market and the producer would get the dollars he needed and could later pay them off with a pre-determined weight of physical no matter which way the price went in the meantime. And back then, the price was often falling, sometimes below mining costs. So this was a good deal for the miners.

There's also another way to think about these two-legged deals. It could also be said that the miner was simply forward selling his future gold production for a cash flow of dollars in the present, locking in a good sales price in the process. The counterparty to this deal, the bullion bank, would then be long future gold and, to offset this long position, would short sell spot gold, borrowing it from the CB and selling it to the market. Here's what another WGC research paper, this one from 2001, said about it:

"Transactions in the derivatives market, whether they are motivated by the need to hedge future production, or to hedge the risk of holding gold in inventory, or simply by speculation, tend to be seller initiated. The other party to the transaction – typically a commercial bank or some other intermediary – will seek to hedge its exposure to the gold price by selling in the spot market (normally borrowed gold). The sale of gold in the forward market therefore generally leads to a sale in the spot market.

When the derivative contract matures, the spot market hedge is removed, and the bank buys back the gold. Thus the effect of hedging by producers and fabricators is to bring forward or accelerate sales in the spot market. The volume of sales brought forward is equal to the net short position of hedgers and speculators.

So long as the net short position is stable, with the initiation of new contracts being offset by the maturing of old contracts, the effect on the spot market is neutral. But over the decade of the 1990s the amount of hedging increased rapidly, with much of the increase occurring in the second half of the period. The net short position increased by a total of some 4,000 tonnes, or around 400 tonnes/ year on average. To put the point another way, to meet the demands of the derivative markets, holders of gold increased their lending of gold to the market by some 4,000 tonnes." [2]

Now let's take a look at what ANOTHER wrote about it.

Date: Fri Nov 28 1997 23:29

The BIS set up a plan where gold would be slowly brought down to production price. To do this required some oil states to take the long side of much leased/forward gold deals even as they "bid for physical under a falling market". Using a small amount of in ground oil as backing they could hold huge positions without being visible. For a long time they were the only ones holding much of this paper.

Date: Sun Nov 16 1997 10:20

It is not only important to understand this question, but also to ask it in context!

Date: Sat Nov 15 1997 20:14
Crunch ( Question for Another ) ID#344290:
Another, a question, please: When gold is borrowed from CBs, what collateral is required by the CB to be assured the loan will be repaid in full?

If you will allow, I will add to your thinking. In todays time the CBs do not sell physical gold with a purpose to drive the price down. They sell to cover open orders to buy what cannot be filled from existing stocks. Look to the US treasury sales in the late 70s. They sold 1 million a month using open bid proposals with much fanfare. If the CBs wanted physical sales to drive the price they would sell in the same way.

The sales today are done quietly with purpose. The gold must go to the correct location. That is why these sales do not impact price as they occur, there is a waiting buyer on the other side. As all of these transactions are done thru certain merchant banks, not direct CB contact, the buy side does hold hedges.

When actual delivery takes place, months later ( and usually at the same time as the CB sale statement ) these hedges come off and affect the market price.


[Central] Banks do lend gold with a reason to control price. If gold rises above its commodity price it loses value in discount trade. They admit now to lending much where they would admit nothing before! They do this now because of the trouble ahead. Does a CB have collateral to lend its gold? Understand, they only lend their good name on paper, not the gold itself. The gold that is put on the market in these deals belongs to someone else! The question is not "Are the CBs worried for the return of gold?" but, "Has our paper been lent to the wrong people?".

Date: Wed Nov 12 1997 14:08

All CBs will now slowly stop all leasing operations and allow the market to size itself. The important players, the oil states, will have their paper covered without question! But, for all others, the great scramble is about to begin!

With this statement, ANOTHER explained the implication of a recent Bundesbank statement following a BIS meeting that would materialize two years later as the Central Bank Gold Agreement (CBGA), which read: "4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period."

Date: Sat Nov 29 1997 15:53

Something interesting happened just ago that will, in time impact the price of gold in US$. A proposal was offered to borrow in broken lots, 3.5 and 5.5 million ozs for resale. It was turned down. The owner offered to sell only, no lease. What turned heads was that someone else stepped in and took it all, at a premium!

Date: Fri Dec 12 1997 21:06

The paper gold market controlled by the BIS/LBMA system is, alone equal to more than all the gold in existence. This market works like a hybrid currency using approximately twenty to forty percent of all CB gold in leased form as backing. The paper behind the lease is a form of CB/gold and is used as a "fractional reserve" that has built this huge market. This system has worked and does work well. You have but to look at the good value that is received when dollar debt ( digital currency ) is purchased with oil. The world works! But this system cannot continue. There is a limit to how far gold can be inflated in quantity using "fractional reserve leasing" as backing. The fatal flaw was found in the "forward sales" of unmined gold. The whole system counted on the expansion of cheap mining techniques to supply much more gold at a cheaper price far into the future. This happened to a degree for a few years but then just leveled off.

Now the LBMA continues to flood the market with paper gold as if nothing has changed! But it has, we reached production cost! That wasn't supposed to happen until the mining industry had raised supply many times what it is today.


Will the BIS try to settle this unbalanced market by destroying LBMA? Or will they drive the CBs to lease another 20% in an effort to inflate this "paper gold currency". Just like the fiat dollar, if inflated it loses value. This is not lost to the oil states.

Here's what the WGC survey found two years later, immediately following the Washington Agreement (CBGA):

"On average, the official sector lends 14% of its declared gold holdings. However the proportion varies substantially from country to country. If the USA, Japan, IMF and major European countries that do not lend are excluded the proportion rises to 25%.


The mining industry is thus the greatest user of lent gold. Short speculative positions exist but appear to be of lesser size.


Hedging has enabled producers to realise higher than spot prices in recent years. However the mining industry is facing a number of derivative-related challenges:

- the total costs of marginal producers in North America and Australia are not being fully covered by average realised hedge prices. South African producers are faring better but their position may not be sustainable in the longer term;

- the Washington Agreement has precipitated a review of hedging practices by both mining companies and bullion banks. Well publicised difficulties with two hedge books have prompted a swing away from the more complex products. However since the more complex products have facilitated the achievement of higher realised prices, this could render hedging more expensive;

- the majority of producers have not been subject to margin calls on their hedging agreements. However the events of September 1999 have caused bullion banks to review the issue with the possibility that additional hedging premiums may be levied on mining companies that are deemed less creditworthy;

- the sharp decline in exploration expenditure implies that the reserve base is not being replenished. This has implications for existing credit lines and the ability to hedge reserves in the ground;

- the introduction of the FAS133 accounting system will also influence the choice of hedging products in the future.

• The bullion-banking industry has been subject to extensive restructuring in recent years. This has had a substantial effect on available credit. Banks’ trading limits have declined in recent years and are currently collectively likely to total some 2.5-3.5m oz (75 to 110 tonnes) of combined short-term net exposure.

• No evidence was found of any collusive behaviour on the part of market participants to manipulate the price." [1]

Date: Fri Mar 20 1998 22:12

I hope all persons could see the "new" true nature of the Central Banks this week. I call it "The change that did happen"! If you read the post of Sat. Mar 07 1998 13:08 Another, that was written for me, it speaks of it all. The [central] banks do want gold to rise now, and they will pull in physical gold to replace leases, even if they must "pay high on the market". They do not rollover these loans now.

Here's the post that ANOTHER said someone else wrote for him:

Date: Sat Mar 07 1998 13:08

The Management of Gold, A Simple Tool for the 90s

For any currency to maintain a "reserve" status, it must be, in some fashion, convertible into gold! In the past, the US$ was freely exchanged for a "fixed" amount of gold. $20 dollars was equal to one ounce. If the country wanted to make its money stronger, it would lower the amount of currency units fixed to one ounce. $10 dollars per ounce made the currency more valuable in the market and it would buy more things. Also, a country could decrease the value of its currency by raising the number of units to the ounce of gold, say $40. The problem with the "fixed" gold system is found in matching the amount of gold in the treasury to the "fix"! To make the money stronger, one had to bring in gold, as it took twice as many ounces to back a currency "in circulation" at $10 as it did at $20! The reverse is true when lowering the money value to $40. Then, one half the treasury gold backing had to be removed as only half was now needed to back the dollar.

You have probably not read this "slant" on the past gold standard because it was never quoted in quite that way, nor looked at in that fashion. If you allow your mind to perceive the above, one will clearly see that it was gold that gave the currency value. In that time one did not look to see how many dollars gold was valued with, rather, how much gold was bid for each unit in circulation!

Today, the world reserve currency is not on a "fixed" gold standard, it is on a "freely convertible" gold standard. One may, anywhere in the world, convert US$s into gold. This new "freely convertible" standard does still allow the dollar to be backed by gold for those who still demand a gold "fixing". That requirement is enforced by a certain commodity, oil. Yet, there is a price for the benefit of having all oil sales settled in US$. Yes, even in this modern era, for the US$ to remain on an "oil standard" it must be on some form of "gold standard"! Regain the perception in the top paragraph. Then understand that for oil to back the dollar, the dollar must find value in gold. And the dollar finds more value if it is fixed by the "freely convertible" gold standard, to buy more gold!

This convertible gold market is old from the mid 70s but is new from the early 90s. It is old by the 70s because it is "freely convertible", but it is new by the 90s as it "is not" "freely tradable"! The US$ price of physical gold is no longer "fixed" from supply and demand, rather it is "created" through the market action of "paper gold". Truly, it is the US$ has become the "item traded" in the "paper gold" market, not physical gold. Participants have yet to realize that the gold futures, gold options and gold forward markets, worldwide, have become little more than currency trading arenas. The percentage of gold delivered against these markets has grown so small as to be nonexistence when compared to actual metal settled at closing. Physical gold does still move, and in size, but this is little or nothing compared to the "paper gold" traded.

We are brought to this point for a purpose, but how did we get here? The largest producers of gold were introduced to the use of large scale "forward contracts" by the Bullion Banks. Once the process started, good business required it to expand. Shareholders want maximum profits at all price levels and "forward deals" were good at any price of gold. Once hooked on "hedge profits" during the good times of a high gold price, the mines now "must have at all cost" "forward deals", just to survive. Some say the mines will not forward sell at these, break even prices. However, the shareholders say it's better to hedge now, for a lower price will bring doom! With the US$ price of gold holding at just above average break even levels, and the ensuing virtual bankruptcy of several well known companies, it appears that the mine owners are correct.

Understand, that many entities lend gold, but it is the CBs that started and do most of it. Their purpose was to create a "paper gold" market that would allow them to manage the "freely convertible" price of gold. The CB lends the gold to a bank that sells it on the open market. ( Usually, the gold is placed privately as it must go to the correct destination. ) Then the bank holds the money and draws interest as incremental payments are made to the mine for new gold delivered against the contract. Over the long period that a mine takes to produce and repay the gold, this money grows. To grasp the fact that the CBs had a plan, is to know that they lend the gold for only 1% or 2% while the proceeds set in a Bullion Bank and grow with interest for the benefit of the BB and the mine! And further, the lenders allow the return of the gold to be extended out for many years, as in "spot deferred". The CBs allow public opinion to think of this as "typical government stupid", it's not!

Now that the gold price in US$ is around production cost, most mines must use "paper gold" to survive. The gold industry is coming under [central] bank domination, without signing away any sovereignty! Slowly, the CBs are gaining the ability to manage production and price with this simple tool.

"If they want new mine supply on the market, they roll over the contract to the BB. If they want new supply off the market, they allow the BB to pay for and take delivery of the gold and return it to the CB vault." "Also, by offering ( or withholding ) vault gold from lease, they affect the lease rate and thereby control private lending as well"

Understand that the second sentence action is used because gold lending is done by many different entities. Many times a mine isn't even involved. Sometimes, gold isn't even involved, just paper. But, it's still based on the gold price! The paper price, that is.

thank you

Date: Sun Apr 19 1998 15:49

Date: Sun Apr 19 1998 14:31
mozel ( @ANOTHER ) ID#153102:
"Was Gold Leasing by CB's an accidental mistake or an intentional mistake do you think?"

Mr. Mozel,
This world of money, it is a fierce one! I ask all, does anyone know a money manager with money for loan at 2%? No? Does not even the bank of Canada sell gold outright and receive "high" interest on cash? Is a CB that sells/leases gold dumb? NEVER!

If they sell gold, a way is clear to "bring gold back" for the nation! Canada has local mines, Australia has local mines, Belgium has South African mines! If they lease gold, it is for a purpose to buy "something" for the new supply to the market! The interest on the loan is for public view, as a "free gold loan" is not acceptable!

It truly started with Barrick, in Canada in the 80s. It was a "thin market", but grew big in oil. I think "intentional mistake" that was, as is said, "trial balloon"?

Thank You

8/10/98 Friend of ANOTHER

The Euro has, in effect already been dispersed in the form of Gold Leases not gold sales. One has only to look at the official gold holdings of most central banks to see that physical gold sales are little more than the average, with a good amount of that coming from nonEuro countries. Gold is a funny thing, it can be sold many times and pass through many countries and still remain in a CB vault. Truth Be told, some 14,000 metric/ton have been sold this way. Far more than the street thinks. Using this amount it's easy to see how certain entities have moved off the dollar standard in the last few years. If we use a future price of $6,000+US, the move is about complete.

The process: An oil country (or others) goes to London and purchases one tonne of gold from a Bullion Bank. The BB borrowed this gold from the CB (leased). The one tonne gold certificate is transferred to the new owner. The gold stays in the CB vault and the owner goes home. The CB leased this gold to the BB and expects it to be returned plus interest. The BB financed the Actual Purchase of this gold mortgaging assets of the buyer. The BB, who created the loan, then uses the cash arranged in this venture to contract with a mining company (or anyone wanting a gold/cross financing deal) to purchase production gold, using this cash to pay for it. In the eyes of the mining company, the BB just sold gold on the open market, for cash, and will purchase future production at the contracted price. The mine does not know where the gold came from, only that it was sold and a fixed cash price is waiting. Of course, most of this made more sense when gold was higher. There were thousands of these deals, structured in every possible fashion. Look to the volume on LBMA and you see where the future reserve currency is traded today!

9/3/98 Friend of ANOTHER

Poland and China are good customers for the BIS. This is real physical gold they are taking out of circulation, not the pay me back when you have a chance lease deals. They really do have the IMF/Dollar countries over the barrel. Under these conditions it's easy for them to drain the Canadian gold reserves. Soon, these goldless countries will be left with nothing but high yield US dollar treasury notes.


My understanding is that whatever collateral was freed up from the USSR , the BIS picked up for others. It left the brokers selling leases for almost nothing or 1/2% or so. No one was buying them so the rate just fell on no volume. This was a lucky move for them as the perception was that massive sales were taking place. I don't think the BIS wants to be seen as a currency destroyer so they are doing the buying quietly.


I think, now it comes time to sell the dollar. As the Belgian gold was purchased to replace dollars, it did announced the end of EMCB leases. Now the BIS transactions do create a gold market that is "not as before"!

We watch this new gold market together, yes?

Thank You


Then and Now – Two very different paper gold eras

Before we move on to 2001 and beyond (i.e., this), let's recap the 90s. From the beginning of the 90s until that last comment by ANOTHER, about nine long years, the $PoG declined from $400 to $280. To put that into perspective, it would be like gold falling from today's price down to $1,150 by 2022. In terms of the long timeframe and the absolute price decline, that would be pretty discouraging for Western goldbugs, wouldn't it? Yet this discouraging era didn't faze those in the East who already knew physical gold as tradable wealth in the least.

What we have here are two very different eras in the "gold" market. The turning point may appear to be 2001 (if we simply look at the gold chart), or the CBGA in late 1999, but the turning point was actually January 1, 1999 with the successful launch of the euro. And from the excerpts above we get a clear picture of the "official support" which helped keep the physical gold market of the East attached (or fixed) to the paper gold market of the West during an era of a declining price.

Official (CB) gold sales were all done off-market so as not to affect the price. (The BOE "Brown's Bottom" auctions were different, but they were also after the launch of the euro.) In fact, we will never know the price or details of these official sales. All we know is that ANOTHER said that physical gold did continue to move "in size" during this era. He even mentioned one CB-sized sale that, presumably, was not by a CB because of the way he told the story.

Someone had 280 tonnes for sale in 1997. Someone else, presumably a bullion bank, offered to lease that gold from the owner in two lots of 110t and 170t, but the owner wasn't interested in a lease. He only wanted to sell. And the interesting part of the story is that when he insisted on selling, "someone" (presumably a proxy for the BIS or a buyer arranged by the BIS) stepped in and bought the whole lot "at a premium" (presumably to keep the sale "off market").

So here we can imagine CBs both buying and selling "at a premium" in order to keep physical gold "in size" moving to wherever it needed to go without affecting the paper gold market price. What was the premium? I can only imagine it was a bit different for the guy dumping 280 tonnes than it was for someone seeking to buy a similar amount. And ANOTHER did give us a hint at the latter.

Leasing was a different story. Most of the leased gold came from official sources, and that did not include the US, the IMF or Japan. The CBs participating in this leasing practice during the 90s lent between 14% and 25% of their reserves per the WGC, and between 20% and 40% according to ANOTHER. CB lending grew from about 900 tonnes in 1990 to at least 4,710 tonnes in 1999 (other estimates take it as high as 7,000 tonnes). The CBs finally admitted to this practice and then a couple of years later announced that it would be curtailed.

The standard explanation for CB gold leasing is that the CBs wanted to earn some interest on an idle asset. ANOTHER said that this explanation was nonsense. He said it didn't even make logical sense unless you thought central bankers were dumb. He said they were not dumb, that they had a plan and a good reason for leasing gold. He also said that the low lease rate was merely for "public view" because "a free gold loan would not be acceptable." The WGC and the MSM all bought the "CBs want to earn interest on their idle asset" story. I guess you can decide for yourself if it makes more sense than ANOTHER's explanation.

That was Then, This is Now

In the 1990s, the supply of leased gold came mostly (~90%) from the CBs. The majority of the demand for this leased gold came from gold mine hedging operations (~60%). Another small portion of the demand (~8%) came from hedge fund short selling. As I said above, both of these "uses" for borrowed gold made sense while the price was falling. They don't make much sense in an era where the price is rising like it has been since 2001.

So, of course, as you would expect, the mining operations have closed out most of their hedge books that were carried over from the 90s. Also, the CBs announced that they had agreed as a group not to expand their gold leasing operations beyond 1999. And any hedge funds that have been shorting gold for the last decade have surely gone out of business. So, most of the supply and demand for gold leasing is gone. The remaining demand (~25-30% of the leased gold back in 1999) is truly physical. It is the inventory leased to businesses that use gold as a raw material for fabrication (e.g. jewelry etc…).

If this is indeed the case, then what would "official support" look like today? Is physical gold still moving "in size" (but off market so as to not influence the price) with the help of the CBs like it was in the 90s? Well, since the first CBGA in 1999 it would appear that the CBs, along with the miners, have been unwinding a lot of what was wound up in the 90s. CB gold sales agreed under the CBGA declined until they all but disappeared in 2009, and in 2010 the CBs turned into net buyers of gold.

Part of my thesis in those last three posts is that official support may have reemerged specifically because of the financial crisis in 2008. If this is the case, and if this official support included CB gold sales, then we probably wouldn't expect to see the CBs turn from net sellers of gold in 2008 to net buyers in 2010. So, perhaps CB sales are not part of the "official support" occasionally helping to keep the paper and physical markets attached.

What about leasing? As I mentioned in my New Year's post, when the CBs renewed their CBGA for the second time in 2009 they forgot to include the line limiting gold leasing which was present in both of the prior agreements. Does this mean they expanded (or at least intended to expand) gold leasing to support the market? I don't know, but as I've already pointed out, it doesn't make much sense today even though it did in the 90s.

For one thing, expanding gold leasing operations tends to increase liquidity in the gold market which tends to drive down the price, yet as I said in my last post, the rising price of "gold" has been a major leg of support. Also, nearly 70% of the "users" of leased gold in the 90s no longer want it because now it's a losing proposition. So even if the CBs wanted to expand their leasing operations, the demand may not be there to get it done.

As I wrote in The Two-Legged Dog, a "long physical gold" position does not support the "gold" market (help keep paper gold attached or fixed to physical), instead it stresses and threatens it. Short physical and/or long paper gold are the only "positions" that support today's (quote-unquote) "gold" market:

"The position that lends the most support to today's "gold" market is "long paper gold and short physical gold." This was the position of Western gold bugs during the early 90s—trading in their physical for paper gold."

It was also the position of the CBs during the late 90s, selling physical and leasing. But today, or at least since 2009, the CBs in aggregate are apparently long physical. And an expansion of gold leasing not only doesn't make sense, it would tend to be counterproductive in an era where the rising price supports the market. In fact, what I was proposing in those last three posts was the occasional "official" levitation of the paper gold price at times when gravity would have otherwise prevailed.

Max De Niro asked:

"How is it that the ECB supports the paper gold market? Do they buy COMEX contracts, LBMA unallocated? Where would this show up on their balance sheet?"

Could there be another way? I don't know, so let's discuss it. And to kick off the discussion, I'll leave you with a few emails from my FOREX market insider. In the past I have called him FOREX trader lady or something to that extent. But from here on out we'll just call him FOREX Trader:


This caught my eye in your latest article. The snippet from the old CBGA that was missing from the latest one in 2009:

"4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period."

Recall the earlier discussion about which instruments were used to hedge nominal exposure to the price of gold?

There is your answer.

"Gold futures and options" has a very broad definition. I would guess that this allows them to operate with impunity on all the major electronic gold exchanges in the world.



This is what long paper short phys looks like on the spread. Thought you might be interested in the chart. This is a "monthly" of gold continuous front month futures contract minus spot gold price.

Theoretically this value should be synthetically very close to Gold lease rates "sell it now, buy it back in a month".

I thought it was interesting that the anomalies in this chart which resemble backwardation showed up in 2008 (and also today!) but not in 1999 or 2001. However, the 2008 anomaly seemed too early in the year to be October or November, where I thought it should be, so I asked him about it.

Sorry FOFOA,

Actually I think there is a problem with the X axis due to the nature of combining different futures contracts to make up the spread chart (i.e. front month is only front month until it isn't then another futures contract must be substituted and concatenated appropriately). So it may well have been later in the year. If I zoom in on 2008 specifically with a "daily nearest" rather than "daily continuation" it looks like this:

I told him that last chart made it even more interesting, and that I might use these charts in a post.


If you are going to use them in a post, here is also the monthly nearest instead of monthly continuation. I provide the different ones because I can't really make a guarantee about the quality of the data.

From my personal experience of trading in Sep/Oct/Nov 2008: shit was fucked up. All markets I traded were the least efficient I've ever seen them. The contango on oil was so retard huge that JP Morgan was filling up tankers and storing for delivery later in the year. Here are just a few examples:

Thank you, FOREX Trader! My thesis is that today's (quote-unquote) "gold" market is somehow different from everything else. It is like the linchpin holding the wheels on a very old bus. It alone can bring the whole thing down if its legs fail. Very few understand this, and it's not even important if they do. It simply is.

The big question now is… does paper gold still have legs?


[1] Gold Derivatives: The Market View 2000 – WGC with Jessica Cross, Virtual Metals Research & Consulting Ltd, London/Johannesburg
[2] Gold Derivatives: The Market Impact 2001 – WGC with Anthony Neuberger, Associate Professor of Finance, London Business School

Saturday, January 5, 2013

The Two-Legged Dog

This is an unbelievable dog named Faith that can walk on two legs!

American - English Idiom: "Have a dog in the fight"
Idiom Meaning - To have a stake in the outcome of the problem at hand or to opt out of being expected to assist.

Someone wanted to know my take on the outcome of Goldhog Day, so here it is.

First of all, I view today's (quote-unquote) "gold" market as a two-legged dog. It has only two legs of support: private support (what we could call "the paper gold bull market" or private demand for paper gold from mostly metals, commodities and currency traders and dealers) and official (CB) support. I don't consider the demand for physical gold to be a leg of support for today's "gold" market. It has been more like a baseball bat to the "gold" market kneecap for quite a while.

Think of it like this: The position that lends the most support to today's "gold" market is "long paper gold and short physical gold." This was the position of Western gold bugs during the early 90s—trading in their physical for paper gold:

Date: Sun Oct 05 1997 21:29

The Western governments needed to keep the price of gold down so it could flow where they needed it to flow. The key to free up gold was simple. The Western public will not hold an asset that is going nowhere, at least in currency terms. ( if one can only see value in paper currency terms then one cannot see value at all ) The problem for the CBs was that the third world has kept the gold market "bought up" by working thru South Africa! To avoid a spiking oil price the CBs first freed up the public's gold thru the issuance of various types of "paper future gold". As that selling dried up they did the only thing they could, become primary suppliers! And here we are today.

The reason for "keeping the price of gold down to free up Western physical gold" was simply to prolong the $IMFS until the euro launch date. But once "that selling dried up" and the CBs became "primary suppliers", there was no longer a need to keep the price of gold down. At that point it was better if it went up!

FOA (8/22/01; 05:18:54MT - msg#98)

The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold. Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it.

FOA (11/3/01; 14:39:16MT - msg#129)

…any massive rise in physical gold values cannot be priced into "derivative gold" without crashing the system… This paper gold market will be cashed out at prices far below real bullion trading…

When I talk about support for today's "gold" market, don't confuse that with price. Always remember that the ultimate supportive position is long paper/short physical. So it is possible to support "the market" at a low price by selling tonnes and tonnes of physical gold. Likewise it can be supported by buying "tonnes and tonnes" of paper gold, which tends to raise the price of "gold" and "stretch" the physical supply.

Again, the two legs of support are the "gold" buying public and the CBs. The actual "use" (hoarding) of this particular commodity (physical gold) is not supportive of today's "gold" market, it is a major threat. And when I put "gold" in quotes, that means all the various paper that tends to move together with the $PoG constituting the entire precious metals sphere as we understand it today. I'm not just talking about a strictly defined type of paper gold. It is also helpful to exclude physical gold demand when conceptually thinking about today's "gold" market since it is a threat rather than a supporting element of that market.

Even though I said not to confuse support with price, the rising $PoG is, in fact, the only thing holding today's "gold" market together. That is, the buying of tonnes and tonnes of paper gold which raises the price of paper gold thereby "stretching" the physical supply is the main action being taken by one or both of the two supporting legs (private traders and/or CBs) that is holding today's "gold" market together.

On 8/22/01 FOA wrote:

"Both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to!"

And this is what we, in fact, saw:

Wednesday, August 22, 2001 - GOLD AT $276
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600

Prior to that, "gold" had been range-bound for two decades.


FOA (08/09/01; 10:27:19MT - msg#93)
"everything to do with a gold bull market"

This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

Clearly, the coming drastic constriction in dollar financial trade will trigger a super "print press" response from the Fed. They will not be pushing on a string; rather picking up the ball of twine and throwing it! All the while using the old 1980s "monetary control act" that opens their use of monetizing almost anything and everything. They won't be adding reserves to the banking system in the future; rather buying any and all debts from anyone that needs fresh cash. Believe it!

The new "world financial architecture" (to use FOA's term) or the "fully-fledged Freegold paradigm" (to use Ari's) will be "assertively rolled forth" only after these two legs of *support* for the old "gold" market are gone. Whenever that happens, I personally envision the price of "gold" free falling very low before trading is halted, but that will be only the effect, the climax of a chain of events or the denouement of today's (quote-unquote) "gold" market. So if we want any kind of advance warning, however brief it may be, I think we should pay close attention to the sentiment of those two legs of support.

And this is the basis of what I called my two "indicators", the FPI and Goldhog day. Those are just silly names that I made up to explain what I think could be a potentially predictive snapshot of the sentiment of these two very different legs of support. The FPI is a snapshot of private support and Goldhog day is a snapshot of CB support. And the timing of Goldhog day is based on a specific theory about the MTM practices of the ECB. This is why I said in my Dec. 26th post that it was just something I was "watching for the next week and a half. It could be a signal of sorts, but I wouldn't put too much stock in it." In other words, take it with a big grain of salt!

For the FPI (or Freegold Puke Indicator) I'm gauging the sentiment of a very narrow band of the market, a segment that we could call the "swing producer" of private support for today's "gold" market. Forget the permabulls (most of the precious metals community) and the permabears (most of the MSM and mainstream investment community) and look for technical traders who have been bullish on gold for most of the last decade but who are always on alert for the top, preferably someone with substantial influence and financial weight.

I have found a good bellwether for my own purposes in this regard, and here are some of the things he has been saying over the past two weeks (paraphrased):

"Gold sentiment is off the charts low right now. It will be interesting to see how low the HGNSI (Hulbert Gold Newsletter Sentiment Index) will go after Friday's (yesterday's) action."

"The more Turk and KWN talk, the lower gold goes. Gold is heading below $1,550."

"Gold sentiment right now is suicidal."

"10 years in gold is enough. I'm selling 100% of my gold over next 3 months."

He believes that the secular "gold" bull market of the past decade has ended and a new secular bull market in the dollar and the S&P 500 has begun. And that's why I said that my FPI had "fired".

It is impossible to know which of the two support legs were responsible for the rising price of "gold" at any given point during the last decade, but I think it's safe to assume that the private (trader) leg carried at least its fair share of the weight most of the time. But there have been a few instances of "support" that seemed counterintuitive or at least "eyebrow-raising".

I presume a fundamental difference of motivation between these two legs. The private (trader) leg supports the "gold" market when it thinks it can make a profit in currency terms. The official (CB) leg supports the "gold" market for a purpose other than profit. That purpose I presume to be the prolonging of the status quo in the absence of sufficient private (trader) support.

All of the instances of curious "support" that have raised my eyebrows occurred during or after the financial crisis of 2008. Granted, I have only been watching since 2008, but even so, there is evidence that this is when "it" began. Take the GLD puke indicator for example. Notice that they began in September 2008:

What makes the GLD puke indicator interesting is that the price of "gold" tends to levitate following a puke. I do realize that there are theories and explanations for why this happens and I'm not going to get into mine in this post. But I did want to point this out as an example of several instances of curious "support" that began in 2008.

The other three instances were the Nov. 2008 bottom in "gold" which I mentioned in my New Year's post, the June 2010 MTM snapshot described in this post and the mysterious "eleventh hour levitation" mentioned in this post. The latter two being associated with the ECB's MTM practices are what gave me the idea for Goldhog day last May.

To my mind there are three prerequisites for a valid Goldhog day. First, we must have a prior FPI firing indicating low private (trader) support, especially from the swing producers. Second, we need a gold price that's significantly lower than we'd expect it to be just prior to Snapshot day given the uptrend of the last decade. And lastly I think it needs to be either a mid-year or year-end Snapshot day, not March or September.

Last May my FPI fired and the price of "gold" was very low for the June Snapshot day which was still 45 days away. But then the price levitated into range by early June which suggests private (trader) support was more likely than official (CB) support, technically invalidating June 29th as a true Goldhog day. So yesterday was our first-ever true and valid Goldhog day!

Someone asked whether the ECB takes their snapshot from the AM or PM fix at the LBMA. The answer is that they take their own snapshot during the day. Sometimes it is close to one of the fixes while other times it is not. For example, last September it was almost the same as the PM fix. The PM fix was €1,377.278 and the ECB's snapshot was €1,377.417. But in June and March the ECB's snapshot was actually lower than both the AM and PM fixes. On June 29th the AM fix was €1,248.012, the PM fix was €1,260.448 and the ECB snapshot was €1,246.624, which is why I picked €1,246 for my Goldhog day prediction.

The actual gold fixes yesterday were €1,254.323 in the AM and €1,262.932 in the PM. We won't know until Wednesday what the ECB snapshot was, but I'm going to guess €1,257. It certainly didn't hit my low of €1,246, so I can't make a decisive call. But I can explain my take on it.

Here are all of the MTM snapshots beginning in 2008 along with the percentage of "gain" or "loss" from one quarter to the next, and also for semiannual periods:

Notice that yesterday was the largest quarterly "loss" by a longshot, which is significant. But I'm focused more on the semiannual periods because, as I mentioned before, there are indications that the mid-year and year-end snapshots might be more important to central bankers (for whatever reason) than the other quarters. One indication is the more frequent dips from quarter to quarter versus semiannual dips, and the other indication is that the two instances of "curious support" occurred at mid-year and year-end snapshots. So take it for whatever it's worth, but there it is.

If we had hit my low of €1,246 this time, notice that it would have registered as a negative number in the far right column, or a "loss". But it wouldn't have been the first one. There was another semiannual decline of -1.1% from January to July in 2011. But this time would have been significantly different from 2011.

The difference would have been that in 2011 there was a huge dip in the price between January and July. So even though July came in slightly lower, it still represented a massive levitation to get there. This time was the opposite. There was a huge rise between July and January so, even though it's flat for the past half-year period, it represents a huge decline (i.e., lack of support) to get to where it is today. Can you see the difference from a CB Snapshot day perspective?

But we didn't get there, even though we came remarkably close. I never thought that anyone would intentionally take the price down. My point, instead, was that if it did happen to fall that far without hitting even official (CB) support, that would be a significant indication to me in support of my other reasoning for 2013 being the year of the window.

As it turns out, the euro price of "gold" did find some support at €1,254. Was that official (CB) support or private (trader) technical support? To be honest, to me it still looks like the two "fundamental" legs of support for today's (quote-unquote) "gold" market are possibly gone. And as I said, normally I couldn't care less about the price of "gold", but I think that my "bellwether" might just be right, that the decade-long bull market in paper gold might be over. If so, look out below!

And if you think this whole post sounds like pure speculative gold-hog-wash, that's because it is! :D That's what you get if you want me to do timing. As I said, take it or leave it, but if you take it be sure to take it with a huge grain of salt.

So what's my take on the outcome of Goldhog day? I say it still looks like "game on" for 2013, Year of the Window!




LBMA’s Best Gold Forecaster Hochreiter Says Bull Market Over
By Claudia Carpenter (Bloomberg) - Jan 7, 2013
(h/t Jeff)

Tuesday, January 1, 2013

Happy New Year!

Year of the Window

It is tempting to believe that extraordinary events must have been carefully orchestrated by someone. This is the main ingredient in conspiracy theories—denial that extraordinary events are caused by the ordinary.

The reason I bring this up is to help you put Freegold in the proper perspective to understand my use of the term "window" as in "window of opportunity". Freegold will certainly be a high impact, extraordinary event as I understand it, and completely unexpected by most people. But that doesn’t change the fact that it could be, and was, seen coming a mile away.

Extraordinary events are caused by the ordinary all the time, and Freegold will be a good example. It has been rolling in like the tide longer than most of us have been alive. If there was a "conspiracy" surrounding Freegold, it was a conspiracy to forestall the inevitable, by those who had the most to gain, until structural foundations could be retrofitted enough to withstand the storm of transition.

With a long view, we can see several times when massive amounts of resources were expended to keep the wheels on the bus at times when it looked like they were falling off. A popular view is that central bankers do this to retain their own power and influence. But a different view exposed by the Gold Trail reveals that it was being done for a purpose: to buy time in order to retrofit the system to withstand the inevitable transition to Freegold.

Look at this chart of the 1980 spike in the gold price. Notice the steep climb in September 1979 with a spike on October 2nd.

(Click to enlarge)

The wheels were coming off the bus. The general fear among European central bankers gathering on October 1st for an IMF meeting in Belgrade was that the global financial system was on the verge of collapse. You might recognize the names of some of the central bankers at that time. Jelle Zijlstra was the President of the Dutch central bank (DNB) and the BIS, and Alexandre Lamfalussy was an advisor to the BIS, soon to become its General Manager.

Fed Chairman Paul Volcker arrived in Belgrade early and left early, departing on the first day of the meeting, "his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness." [1] But don't think this was about the price of gold. Gold is the linchpin of the system, but that spike in gold was to the collapsing system like a fire alarm is to a raging inferno. You can't put the fire out by simply turning off the alarm.

Those central bankers looked into the abyss, and then took emergency measures to buy the time needed to retrofit the global monetary and financial system so that it could weather the storm they saw coming. One thing was that Volcker was pushed to take quick action that, reportedly, was not embraced by the Executive Branch. But that wasn't even the half of it. Those European central bankers also decided to support the dollar's exchange rate by buying dollars:

FOA: "My point was that their actions can only be justified from a position of "buying time". Most of the major World and European countries had economies and currencies that could stand on their own in a competitive world. Yes, their transition from a dollar reserve would have been painful. But, compare that loss to the percentage of lifestyle gain they paid as a tax to the US by artificially maintaining the dollar exchange rate. Their Central Banks support polices were a decision to waste their citizens' productive efforts in a process that held together a failing currency system.


It seems the only explanation for the continued support of the dollar came in the form of "buying time": time to recreate a world reserve currency. But this time, make it subject to a whole group of diverse nations of conflicting political wills. In this format no one country can call the shots for the world. In addition, take away the need to compete with gold. Let gold be a supporting "reserve asset" that trades in a free market, unlent and non monetary so as to circumvent its manipulation."

You can see that post-1980 European CB support for the dollar in stark relief here. And the other thing they did was to encourage and support the development and expansion of a vibrant and explosive paper gold marketplace for the purpose of absorbing the demand for gold in support of the dollar. Again, this was the European central bankers supporting the status quo in order to buy time for...

FOA: "On January 1 1999, the Euro was born. On the headlines of almost every paper, the new Euro currency immediately became the topic of speculation. How high or low would it go,,,,,,, will it last,,,,,, what good is it,,,, and on and on. Yet, completely hidden from view and outside most speculator interest, one important item was overlooked. Once this competing reserve currency was formed, the two major power blocks of the world no longer shared the purpose of maintaining a paper gold market! Established, maintained and supported for the purpose of absorbing the demand for gold, its price damping effects were no longer needed."

This is a good example of a major, multifaceted, coordinated, long term (20 years!) European central bank effort to forestall the inevitable transition for the good of the entire global monetary and financial system, and by none other than those who stood to gain the most from the transition. Evil bastards! ;D

ANOTHER: "The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up… Westerners should not be too upset with the CBs actions, they are buying you time!"

Then came the 90s when, as ANOTHER stated above, those European CBs became suppliers to the gold market as the whole "paper gold thing" didn't work out quite like they thought it might:

ANOTHER: "The BIS and other various governments that developed this trade ( notice I didn't use conspiracy as it was good business, as the world gained a lot ) , thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such. But, without a major increase in gold supply, the paper created by this "gold control operation" will either be paid by, 1. new supply. 2. the central banks. 3. rollover existing. 4. cash? 5. or total default! As the Asians started buying up everything last year ( 97 ) , number 5 and 5 started looking like the answer! When the CBs started selling into this black hole of demand, the discussion of #5 started in their rooms also."

For example, Wim Duisenberg, who followed Jelle Zijlstra as the head of the Dutch CB and later became the first President of the ECB, oversaw the sale of Dutch gold in two significant tranches of 400t (announced January 1993) and 300t (announced January 1997), and by decade's end had allowed for the lending of up to 15% (150t) of CB gold reserves.

But then, in a surprising policy reversal, he led the European central bankers in their Joint statement on gold, also known as the CBGA or the WAG. This statement was a very simple press release which, in essence, reversed the gold policy of the previous two decades and put the paper gold market makers on notice that they (the European CBs) would no longer be the lender of last resort for gold:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.

3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.

5. This agreement will be reviewed after five years.

One could say that a window of opportunity for something had just opened. That was 9/26/99. On 9/29/99 the paper gold market imploded. The price of gold quickly rose 22% over a two week period (which would be like gold spiking to $2,030/oz. next week) and, for a brief moment in time, the lease rate spiked and the GOFO plunged signaling backwardation in the gold futures market.

There was a rumor that the Fed and the BOE were active in silencing the fire alarm that time:

"In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999. Mr. George said "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.

Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."

In 2004, the European CBs renewed their "Joint Statement on Gold" as promised, but for some reason the BOE didn't participate this time:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons.

3. Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.

4. This agreement will be reviewed after five years.

Then, in 2008, something happened.

2013 – Year of the Window

I'm pretty new to this trail. I only started hiking it in 2008, a year that, like 1979 and 1999, the wheels almost came off the bus. Were massive resources expended at a loss just to keep the wheels on the bus that year? You be the judge.

I have relayed my own personal experiences buying gold from my local dealer in October and November of 2008 as anecdotal evidence of a tight supply (that I encountered) while the price was plunging from $900/oz. down to a low of $713/oz., and then plentiful supply at the bottom. I don't know. Did someone go massively short physical and long paper gold (or futures) in November of 2008 in order to support the paper gold market as the linchpin holding the wheels on the bus? Did somebody willingly take losses in order to delay the inevitable a little bit longer?

These charts are like a seismograph that records an earthquake, an explosion or some abrupt disturbance in the force. I do not think they are predictive. I do not think they are even descriptive enough to tell us what happened. They simply show us, in hindsight, that something happened. It is up to us to decide what we think happened.

So what happened in late 2008 as a result of the financial market collapse that began two months earlier? And did the European CBs do anything to forestall the transition once again? I don't know. But it is noteworthy that when they renewed their Joint Statement on Gold eight months later the #3 line about limiting gold leasing was gone and in its place was a line about IMF gold sales:

In the interest of clarifying their intentions with respect to their gold holdings the undersigned institutions make the following statement:

1. Gold remains an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2009, immediately after the end of the previous agreement. Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes.

3. The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.

4. This agreement will be reviewed after five years.

One thing that I was missing back then (2008-2009) was the wider perspective of someone who had been hiking this trail a lot longer than I had been. Then, in late 2009 or early 2010, Belgian put me in touch with Aristotle and we started emailing.

Ari had been following ANOTHER and FOA since their very first comments on Kitco back in 1997, and he is also the only person I know of who exchanged private emails directly with FOA during the Gold Trail years. He is also the one commenter from "back then" who, in my opinion, "got it" better than anyone else.

Somewhere around the turn of the century, or perhaps even right after FOA disappeared, Ari decided to subscribe to the Central Banking Journal, a quarterly trade publication put out by and for central bankers. It costs about $800 per year to subscribe. He has read every single issue of this boring trade publication, cover to cover, for more than a decade now. And I mention this simply to illustrate for you his extreme focus on central banking policy discussions, at least since FOA went away.

Ari has been hiking this trail a lot longer than I have, he understands it better than I do, and he thinks that central bank policy discussions are relevant to the potential timing of FOA's "changing world financial architecture" aka Freegold. As I mentioned just last week, my July 2010 post Timing Is Everything came directly from a curious email exchange in which Ari introduced me to the idea that, perhaps, the European central banks are somehow supporting the paper gold market at certain times.

Then, later in 2010, he introduced me to another idea: that 2013 might be the new "window" being targeted by the central bankers for transition to the new "world financial architecture" (aka Freegold). So, yes, I have had my eye on 2013 for two years now, and I decided on this name (year of the window) back in November. Fonoah can vouch for that since I mentioned it in an email.

What I'm trying to do here in this post is to share with you the nuances of my perspective and my reasoning behind the chosen name. Being a "window of opportunity" does not mean that I think they plan to "pull the trigger" or "push the button" or whatever. Nor does it mean that I think the wheels will fall of the bus this year. It's more a question of whether "they" will sacrifice valuable resources in an increasingly costly attempt to forestall the inevitable next time the wheels start to come off this 100 year old bus. And as I mentioned last week, we may get a glimpse of their state of mind in this regard by the end of the week.

If you think that the IMF can unilaterally forestall the inevitable with more gold sales, consider that the IMF has "pledged" gold, similar to the ECB and the BIS. It is not a sovereign nation with its own reserves. When we see sales by these types of entities, they are likely the visible result of a group decision rather than a unilateral action, which would explain the mention of IMF sales in the most recent CBGA.

Could the Fed do it? No, only the U.S. Treasury could, and as FOA said they eventually would, that would be the sign we are looking for—the U.S. Treasury selling U.S. gold to defend its dollar! What about the BOE? What's Gordon Brown up to these days?

I'm going to share with you Aristotle's thoughts on this, beginning with that email back in 2010. I haven't heard a peep out of Ari in a few months, so I can't speak to his latest thoughts, but the following covers roughly the last two years on that ever-elusive topic – "timing":

ARI (via email Dec. 2, 2010) - For the past half-decade, many international policy stirrings gave every indication to me that 2010 was to be the targeted year for assertively rolling forth the freegold paradigm. But as I've said previously, I feel that the ongoing financial crisis that began with the subprime fiasco has caused instability of such magnitude that the central bankers have been forced to delay briefly and "play it safe" -- one does not dare rock the boat (if there remains any choice in deciding the matter) when the financial waters have become so turbulent and choppy. As for the new timeframe, I'd say that the reported EU plan "to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013" is as good an indication of a benchmark as any I've seen. Plus, that timing nicely accommodates my additional view -- embracing a culturally significant standpoint -- that the December 2013 conclusion to The Hobbit will forever cement the desire for gold into the minds of all western moviegoers, resulting in a perfect storm of the golden variety. ;-)

On the point of the midyear "benchmark" mentioned above, it's almost spookily funny that the song lyrics mention "You just gotta ignite the light and let it shine; Just own the night like the Fourth of July". Indeed -- 2013. (Or sooner, if *necessity* precludes all freedom of choice in the matter!)


ARI (hinting at his "timing thoughts" in a comment on Mar. 14, 2012) - Gather up the last easy bits of your treasure seeking exploits... the next 24 months will bring reverberations through our (global) culture as profoundly as is yet possible in this largely jaded and detached age of ours. Even now, can you hear the distant pulsing of air beneath the dragon's wings?

Gold. Get you some. --- Aristotle

FOFOA (via email May 11, 2012) - In that 2010 email, I believe you had your eye on the ESM set to begin in July 2013 when the EFSM is set to expire. But did you know that the ESM is expected to be ratified this July and run concurrent for a year?

I was curious if you still had your eye on the ESM as a “window of opportunity” and if this hastened timeframe portends an earlier window.

ARI (via email May 20, 2012) - Spurred on by the inquiry of your May 11th email, I took some time to read the latest progress on these treaties (both the 2011 original and lately amended 2012 ESM, plus the auxiliary Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) last weekend, but somehow failed to get back with you on my thoughts. Probably because I came away with nothing very sound or profound as a result of my reading. I can't bring myself to imagine that the hastened timeframe for start of the ESM necessarily portends a more imminent transition to our freegold environment so much as it strikes me as a sign of how much the ongoing European ructions have kept the euro area member states focused and in frequent contact. Avenues for earlier-than-expected adoption were thus available and easily taken.

I took (and still do take) the facility of the initial European financial stability programs to make somewhat expedient new loans for the benefit of distressed euro member states until mid-2013 as an emergency measure and temporary bridge to give legacy bond holders (especially the banks) some time and space to regather their wits and come to better grips with the new reality. With the sunsetting of these expedient funds, the relatively cushioned ride of old bondholders on the backs of the stronger taxpaying populations should be nearing its end as any new funding (to be arranged now through the ESM) will come with stricter conditionality and will ensure the ESM holds preferred creditor status -- secondary only to the IMF.

Thus, banks (and any other sensible parties) who hold, or are potentially in the market for, European sovereign debt will be well advised to consider their place in the overall pecking order going forward, and of the real risk posed by national bonds after all.

A snip from The Telegraph today shows the likes of HSBC and Deutsche Bank still trying to think through it all and work out how to cope...

( -- A note from HSBC staff this week said they are increasing their holdings of the yellow metal in the face of “deteriorating” economic momentum, in addition to adding cash and Treasuries (US government debt).

“In the continuing absence of plausible alternative growth drivers, we believe that this increases the chances that central banks will engage in further QE,” explained Fredrik Nerbrand, the bank’s global head of asset allocation.“This is likely to be accompanied by increased inflation expectations; hence, we increase our exposure.”

Not all are convinced gold is about to climb again, however. Analysts at Deutsche Bank think the increasing speculation about a Greek exit from the euro adds to the downside risks.

The argument is that, with gold showing a strong opposite correlation with the US dollar at the moment, if the euro falls, the dollar rises and gold drops backs.

However - stay with it - they see an actual 'Grexit’ as bullish for the euro. By implication, it would be for the gold price too.

The City is not singing gold’s swansong yet, but it is certainly braced for more volatility.

FOFOA (via email May 27, 2012) - Here’s a passage from your 12/2/10 email:

"For the past half-decade, many international policy stirrings gave every indication to me that 2010 was to be the targeted year for assertively rolling forth the freegold paradigm. But as I've said previously, I feel that the ongoing financial crisis that began with the subprime fiasco has caused instability of such magnitude that the central bankers have been forced to delay briefly and "play it safe" -- one does not dare rock the boat (if there remains any choice in deciding the matter) when the financial waters have become so turbulent and choppy. As for the new timeframe, I'd say that the reported EU plan "to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013" is as good an indication of a benchmark as any I've seen."

Regarding the highlighted portion, check this out:

Sweeping reforms to shift the burden of rescuing failing banks from taxpayers to bondholders

It's from this…

Fresh fears as EU finalises reform plans
May 25, 2012 7:08 pm

Sweeping reforms to shift the burden of rescuing failing banks from taxpayers to bondholders are to be unveiled by the European Commission, despite fears it will further rattle nervous bank investors.
When a bank is deemed to be failing, regulators will win extensive powers to write down non-guaranteed deposits and senior unsecured bondholders, according to draft proposals obtained by the Financial Times.

While the broad thrust of EU bank resolution reforms are well known, its publication has been delayed for more than a year over fears the so-called “bail-in” tools would make it even harder and more expensive for banks to raise money.

There remain extreme sensitivities over the details. The FT has seen three recent drafts that show fundamental elements of the scheme are still being rewritten, with just a few weeks before the expected publication date.

The latest version includes one big political concession. Rather than forcing banks to raise an EU minimum of debt that can be “bailed in”, national authorities will have discretion to tailor requirements.
If approved in the final version, the increased flexibility could leave a patchwork of different regimes and requirements across Europe.

However, it would placate some countries opposed to the original commission measure, which forced big banks to raise bail-in debt covering 10 per cent of their liabilities. To meet this, Barclays Capital estimated listed banks would need to issue €600bn-€1tn of debt that can be bailed-in, which is more risky for investors.

Michel Barnier, who oversees EU financial services, is determined to unveil the plan in early June, within days of the Greek elections and at a time when most European banks are shut out of funding markets. He said the plans were “well thought through” and would not unsettle markets because they were “long term”.

“This is not a bad framework,” said one big European bondholder. “But it’s not going to be well received. This is a terrible time to release it.”

Experts on the reforms say the response will be unpredictable. “The commission may have decided that things are already so bad that nothing can make them worse,” said Bob Penn, a partner at Allen & Overy.

“But it is not going to help share prices or funding. It is not going to help ratings or funding costs. It will help the regulatory arbitrage business, as people duck and dive to avoid things.”

Under the plans, when a bank is judged to be failing and at the point of collapse, regulators will assume emergency powers to sack the management, restructure the bank’s assets and write down unsecured creditors.

EU members will also be required to establish resolution funds, which would be mainly bank funded and could include existing deposit guarantee schemes. National funds would, under normal circumstances, be required to lend to other country’s schemes if necessary.

Other draft changes include setting bail-in implementation for 2018, a later date than expected. Short term debt of less than a month maturity is protected, along with guaranteed deposits.

Regulators are also given some leeway in sparing derivatives counterparties should closing out positions during a debt writedown threaten financial stability or put a clearing house in danger.

ARI (via email May. 27, 2012) That article is a good catch, FOFOA. Much more so than the considerably less-consequential ESM treaty timeframe and implementation that we knocked about a few days ago, this article truly bites at the meat of the original matter mentioned in that 2010 email. And here we see how interminably these things can remain in flux, such that there is now in draft an extension of the timeframe from 2013 to 2018 as cited near the conclusion. You know... I can see where language to that effect could be more popular (among the banks and bondholders) from a simple delaying standpoint, but I would seriously question the likelihood that such a stretch could/would actually be made -- given the greater benefits to be had with fully-fledged freegold in the meanwhile coupled with the favorable cultural and political inertia to be had respecting the timeframe that commences mid- to late 2013 and into early 2014. But if we're looking at a serious attempt to hold the current course for five more years... jesus, that's a lot of stimulus and geopolitical rhetoric and nonsensical economic posturing just to get there -- not to mention five whole more years of the same ol' jaggedy march higher in MTM gold... (which is surely great for the young acquisition-minded, but equally frustrating for the established/retired gold holder.)

-- Ari

Well, there you have it, the full extent of my "timing" discussions with Ari. As most of you should know by now, I don’t do timing anymore. But seeing as the beginning of a new year is the traditional time to make (mostly failed) predictions, I do dip my big toe into the hazardous river of broken crystal balls once a year. And now, hopefully, you understand my reasoning for calling this The Year of the Window.

As for my specific prediction, here it is again from last week's post:

If the recorded price on Friday, January 4th, 2013 is EUR 1,246 or lower, it's game on for Freegold meaning that the window of opportunity is now open because official support for paper gold has apparently ended. In other words, there may be no system support the next time something breaks. But if the recorded price on January 4th is EUR 1,389 or higher, it's six more months of kick the can. And if it's anywhere between EUR 1,246 and EUR 1,389 (which it is today) then the €PoG will be too ambiguous to be predictive one way or the other.

For the full explanation you'll have to go read the post. But even if the €PoG doesn't hit one of those targets, whatever it does between now and Friday is still interesting to me (and I normally couldn't care less about the price of paper gold). So once again, here's a chart of euro gold so that we can keep an eye on it this week:

Once in a great while, perhaps, extraordinary events, say, caused by a century of the ordinary, cannot be delayed anymore, even by the most extraordinary efforts.



New Year's Party Music!

This year I'm featuring the videos of Freegoldtube that I used in posts throughout the year. If you watch only one, make sure it is his magnum opus, The Ecstasy of Gold, at the bottom. And if you appreciate the very time consuming work he puts into these videos, please be sure to let him know because I think that his drive to continue making Freegold videos may have stalled. How many blogs have someone like Freegoldtube making videos like this?

From Peak Exorbitant Privilege:

From Fallacies — Paper Gold is like Paper Anything:

From Four:

From Deutsche Bank explains why we hoard gold:

From An American Horror Story:

From What is Gold?:

Happy New Year to all of you and all the best in 2013... Year of the (now open?) Window!