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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Open Letter to EMU Heads of State

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Originally posted Sunday, May 9, 2010

http://www.fofoa.blogspot.com/

Dear Angela, Nick, Silvio, Jose, Jan, Yves and the rest of you too,

I was just sitting here thinking about some of your statements this weekend like, “We will defend the euro, whatever it takes,” and “When the markets re-open Monday, we will have in place a mechanism to defend the euro. If you don’t think that’s significant, you haven’t been to many EU summits,” and that you will “confront speculators mercilessly.” Sounds exciting, I thought.

And then I started to wonder, Could they really be ready to use “The Nuclear Option” on Monday? (And by the way, the nuclear option I was thinking about was NOT printing up another 500 bn euros.)

But then it hit me. “Holy Cannoli!”, I thought, “they don’t even know!”

All of a sudden it hit me that I know something you guys don’t! Please bear with me as I try to explain this.

What hit me like 400 tonnes of BOE gold pitched by Gordon Brown was that none of you politicians know what the Central Bankers know. That there is actually another option for saving the euro. You see, unlike Central Bankers, you slick politicians come and go with some regularity (I noticed a couple elections just the other day). And also unlike Central Bankers, you guys have notoriously loose lips and wild-ass socialist political agendas. So chances are they don’t fill you in on all the minutiae of everyday central banking. So it would be easy to also leave out a whopper of a secret along with the minutiae.

Now what I’m about to tell you might sound a little “tinfoil-esque”, but I’ll back it up with a logical proof and some whistleblower testimony. I’m going to tell you about a secret market that maybe only 100 people in the whole world know exists, because they transact in it. And I will also present what I see as a logical proof that this market MUST exist, or else other markets would not be the way they are today.

Every scientist knows that there are invisible objects that can only be observed because of the affect they have on other visible objects. Black holes are a good example. And this secret market is the same kind of thing. It is like a black hole around which all other markets rotate like a giant gravitational galaxy. It exists because it MUST exist for things to be the way they are. And in addition to this logical proof, I’ll also point you to a Central Bank insider that leaked this information to a few of us 12 years ago when he predicted something like today’s Global Financial Crisis was eventually, inevitably going to happen. More on that in a moment.

The point is, these Central Bankers do have a secret “Nuclear Option” at their disposal (other than printing more euros). And they WILL use it if and when they are backed into a corner. They know it’s going to blow up on its own soon anyway, so they have no guilt about it. But in their back pocket they have a secret trigger, just in case. But the question for you, Angela, Nick, Silvi, Jose, Jan and Yves is, Will they use it in time to save your political careers, or will they only use it if it is needed to save their own butts?

Now you might be thinking, “How can this secret help us now if it is so secret and under the control of the Central Bankers?” Well here’s the beauty of it: All it will take to deploy this “Nuclear Option” and reset the monetary and financial world back to a sustainable basis is one simple announcement, the revelation of the existence of this market, or even a credible leak will do the trick. (You guys are good at leaking stuff, right?) So here we go.

In case you haven’t guessed it yet, this secret market I’m talking about is a gold market. But it is a separate gold market from the LBMA and the COMEX that we all know about. It has a different market-maker and a different price! It is the other half of a two-tiered gold market that has been operating in secret for at least 15 to 20 years.

But this is nothing new, of course. The Central Banks ran a two-tier gold market openly prior to 1971. They traded their CB gold with each other for $35/ounce while the plebes traded gold in the ordinary market at around $44/ounce. But even that $44/ounce price wasn’t a totally free market price because the market had to price in the probability that the two-tier system would eventually end and the ‘membrane’ separating the Central Banks’ 30,000 tonnes and the private ~100,000 tonnes would be broken. And apparently the market was right, it was broken!

Alexandre Lamfalussy wrote about this two-tier gold market in 1969 in his paper presented at the IMF titled The Role Of Monetary Gold Over The Next Ten Years:

“Even in the absence of effective purchases or sales on this market by the central banks, this price would only become the “true” price if all the buyers and sellers of the metal acquired the conviction that no central bank will ever connect the two markets in any way. As long as this conviction does not exist–and it does not appear to exist today–the price on the ordinary market will take into account potential purchases and sales by the official institutions. Quite clearly, the market is at the moment discounting possible purchases (rather than sales) by the central banks.”

(Incidentally, I should point out that Lamfalussy made the news just this weekend saying, “The euro zone is stable despite the financial woes of Greece.”)

What Lamfalussy said the markets were facing in 1969, the rejoining of CB gold and private gold in one market, is exactly what we are facing today. It did happen back then and it will happen again. The only question is the timing. And that’s where you come in! More on this in a moment.

So anyway, the two-tier market ended in the early 70’s as we all know. But what we don’t all know is that it started back up some time later. My best guess is that the BIS started it back up sometime between 1985 and 1995. But why would the BIS do this? The answer in one word… size!

What the gold market evolved into after 1980 was a market based mostly on legal contracts instead of physical gold. Futures contracts, forward contracts, mining contracts, custodial contracts etc, etc… And while this contract gold market worked well for the plebes, it did not have the physical liquidity to supply really big orders, like the ones that come from sovereign entities and central banks. So the choice faced by the BIS was to either let these large entities bid for their gold in the contract market (and bring down the system like almost happened in 1979/80), or to restart the two-tier system where very large orders of physical gold could be transacted without affecting the contract market price. And restart it they did!

Now, since you guys are politicians and probably love the fiat money system, I need to give you a little background on the importance of gold. This is simply factual economic stuff. Trust me, I won’t bore you with goldbug gobbledygook.

The first thing you must understand is that gold is the monetary metal precisely because it is NOT scarce. There is misinformation out there about rarity and scarcity giving something a monetary value. Rubbish! The fact of the matter is that gold is valuable as a monetary commodity because its price is STABLE! At least it is supposed to be. All the gold ever mined is mostly still with us. That’s about 160,000 tonnes. Most of that is in private hands now, not with the central banks.

The FLOW of gold on the markets is tiny compared to the stocks of gold in the world. Gold is not used up in industry like other commodities. It is just moved around like poker chips on the table. It is this extremely large stock (all the gold ever mined) that makes the price of gold relatively immune to supply and demand shocks unlike other commodities. So if there is EVER a severe supply shortage of physical gold it means only one thing: There is something wrong with the price discovery mechanism!

Now, the effect of the contract gold market on the ordinary price of gold has been to keep it at manageable levels for 30 years now. But physical gold and contracts for gold are different things entirely. New contracts can be produced much faster than new physical gold can be mined. But when demand shifts from contracts to physical (which is happening) this puts great strain on the market that tries to price them as equals. And what must ultimately happen when this strain breaks the parity between physical gold and contract gold is that the membrane separating the BIS’ physical gold price from the ordinary market will break.

When this happens, all your debt problems will be reset to manageable and sustainable levels again. In fact, the entire monetary and financial order will be reset. This is going to happen. And the Central Bankers can make it happen whenever they want, when they finally feel the heat of the fire on their own butts.

Jim Rickards, Senior Managing Director for Market Intelligence at Omnis, Inc., made this comment recently:
“One point that does not get enough attention is the impact of size in the physical market. It’s one thing to say that COMEX is $1,100 per ounce and physical might be $1,200 per ounce for one metric tonne if you can find it. But what about 100 tonnes? 500 tonnes? Physical orders of that size are impossible to execute outside of official channels. Size of order is relevant in any market but I have never seen a market (short of a full blown manipulation or short squeeze) with as much price inelasticity as physical gold which is why the buy side overhang keep their intentions to themselves.”

Interesting statements, eh? And believe it or not, they actually let this guy on CNBC! “Keep their intentions to themselves.” Do they? That would be mighty benevolent of them. Or do they have another place to go for their big transactions?

So here’s what’s going on: The regular gold market suffices for the general public, some of the “big money” like the ETFs and hedge funds, and the hedging needs of the commercial banks. The majority of this demand for gold is for hedging against a currency crisis like… uh… this one! And the banks are perfectly happy with their contracts to show on paper that they are hedged. Fine. Whatever. But what the regular market CANNOT handle is the really big physical gold transactions. That’s where the BIS comes in.

So this is what the BIS is doing, and has been doing for probably 20 years. It is making the market for a second-tier, physical only, sovereign and central bank gold market. This market is totally separate from the LBMA and the COMEX because it has a separate market-maker and… a separate price! More on this in a moment, because we do have a clue as to what that secret price might be!

Now, before you run to your respective national central bankers to verify my story, let me just say that this is a very small secret market. That is, there are only a small number of people in positions of authority that know about it. And I don’t know if all the EU member states’ national central banks ever participated in the “bid and offer” portion of this second-tier market. It probably started during the run-up to the euro launch and the BIS might have been dealing with EU members differently.

You see, before 1971 central bank gold transfers were part of the monetary adjustment mechanism. And during the run-up to the euro launch it is reasonable to assume that eurosystem gold was returned to this function. So inter-central bank gold transfers within the EMU during the 1990’s were likely “managed” by the BIS to smooth the monetary transition, rather than being a free market system of bids and offers. So go ahead and ask them, but if they don’t know what I’m talking about that doesn’t mean it doesn’t exist.

I’ll tell you who probably does know… The ECB knows. Trichet. The BIS. The SNB. The PBOC. The Saudis. Probably Russia and maybe even the BOE. I also suspect the IMF knows about it because they refused to sell any of their announced “gold for sale” to the private sector at the COMEX price…

See: Eric Sprott: “That left 191.3 metric tonnes left available for purchase to qualified buyers, which include central banks and sovereign nations. According to Kitco, Eric Sprott bid to buy the remaining 191.3 tonnes and the IMF refused to sell it”

and…

GATA: “Coincidentally, GATA learned this week on the best authority that a financial house far bigger than Sprott also recently tried to purchase gold from the IMF, also was refused, and wasn’t very happy about the refusal.”

Hmm… strange.

What this tells me is that unlike pre-1971, the second-tier gold price is now actually HIGHER than the regular market price. The opposite situation! And of course this makes perfect sense. Why wouldn’t it be higher? How could extremely large orders, so big they would send the price on the ordinary market to the moon, be handled in physical only at a lower price like, say, $42.22/ounce (that’s the US Treasury price, in case you didn’t know!)? Precisely… they couldn’t.

Just because we’re talking about central banks and sovereign entities here doesn’t mean regular market forces don’t apply. They do! And as such, consider the BIS’ role as the market-maker in this extraordinary market. From Wikipedia:

A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread… the market maker sells to and buys from its clients and is compensated by means of price differentials and for the service of providing liquidity, reducing transaction costs and facilitating trade.

So here’s a big point in the logical proof: This market does exist. If it didn’t we would have to accept some very unlikely assumptions about large interests like the Saudis, the Chinese and the Russians. For one thing, that they are benevolent to the outside world when it comes to protecting their wealth. What I’m saying is that a market for very large transactions (buy and sell) of physical gold does exist separate from the LBMA and the COMEX, because they cannot handle the size. The BIS is the market-maker in this market and in that role, it must be discovering a price that would rock the financial world if published!

Now, before I move on to the current price on this second-tier gold market, which I’ve already shown must be higher than the LBMA paper fix, let’s look at how exposing this market would help the EMU and the euro. I’m sure you are aware that, unlike the US Treasury that keeps its gold booked at $42.22/ounce in perpetuity, the ECB marks all eurosystem gold reserves on its financial statements to the market price each and every quarter. What this does to the balance sheet is quite amazing to watch, even at LBMA/COMEX prices! Just imagine what it would look like at BIS prices!!

This is the elephant in the euro chamber that no one wants to talk about. But not so for the dollar. Back in December of 2008, right after the market collapse, none other than former Federal Reserve Governor Lyle Gramley hinted that a big upward revaluation of gold could figure heavily in the Fed’s attempt to rescue the U.S. economy and its own balance sheet during an interview with Niall Ferguson on the Business News Network in Canada.

In the interview, Ferguson asked: “I’ve heard it said that the Fed has turned into a government-owned hedge fund, leveraged at 50 to 1. Do you feel nervous about what this might actually do to the Fed’s reputation?”

Governor Gramley replied: “I think you have to reckon with the fact that one of the Fed’s assets is gold certificates, which are priced, as I remember, at $42 an ounce, and if we were to price them at market prices, the Fed’s leverage would look a lot less than it is now.”

The video: BNN interview with Gramley

Here’s a thought, what do you think would happen to Greece’s reputation (and balance sheet) if its gold were revalued to the physical price at the BIS? I have some trivia (or not-so-trivia) for you:

Did you know that Greece alone has 14 times as much gold per capita as China? Do you realize that your “PIGS” actually have the same amount of gold per capita as the US claims to still have? (PIGS=25 tonnes/million people; US=26 tonnes/million people) And did you know the PIGS combined have 34 times as much gold per citizen as China? Astonishing really. A big gold revaluation should do quite a job on their reputation as swiney muddlers, especially compared to, say, California? I forget. How much gold does California have left?

So, what could I possibly know about this super-secret price on the super-secret central bank and sovereign-entity physical gold market? Well, I have a whistleblower! ANOTHER, we’ll call him, since he could get in trouble if we knew his real name…

“…Then, in October of 1997 at the internet’s only gold discussion forum of the day, a series of remarkable postings began appearing under the pseudonym “ANOTHER”, offering plausible answers to those questions. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text…

“In the final analysis, ANOTHER offers one of the more plausible hypotheses for why the financial markets have acted as they have in the past few years, and therein lies his immense value to the reader, no matter who he is. Again, knowledge as is conveyed in his series of “THOUGHTS!” is rarely to be found outside the highest levels of international finance…

“As explained by ANOTHER, an opportunistic arrangement for massive physical gold acquisition among important petroleum producing and exporting nations could be comfortably facilitated…”

That’s part of the introduction to the archives found here and here. Here’s the real stuff…

Date: Sat Apr 18 1998

ANOTHER (THOUGHTS!) ID#60253:
“What Is The Real Price Of Gold IN The Central Bank World?” The one that posts using SDRer, has shown many times how “Gold Value” is used in international trade. What cannot be seen is the value of gold in the “INTERBANK” world. Here is the realm of “true valuations” in paper currency terms. It is a real shocker for lesser eyes.

In this modern world, the current value of every asset is formed by a relationship of gold/currencies/oil. This cross relationship is the “very basis of our modern world banking system”!

Through this basis, all currencies are given value as the local government treasuries hold US$ as reserves. The US$ is given backing as its government is guaranteed that all crude oil, worldwide, will be settled in dollars. An oil reserve backing, if you will. And the “value” that the “future supply of” currency traded “oil” imparts to the world economy, is guaranteed by an “INTERBANK paper gold MARKET” that values “physical bullion” in the Thousands!…

But, how can this be, you ask? It is done, “right before your eyes” and we see it not! I ask you, if you have one ounce of gold, and sell it on the market for $300, it is worth $300, yes? Now, what if a CB holds one ounce of gold, and sells it twenty times, that one ounce is now worth $6,000, no? The difference between you and CB? The persons that hold “interbank” IOUs for gold, value them at the multiple of leases/sales made against reserves. This leverage, it is held for performance on bank part. The BIS, it forces performance, on any economy! You ask Korea about gold, yes?

This is why oil can take a small amount of physical gold out of world supply, at current “freely traded”, “managed prices”, and hold it at a many times valuation. That is what gives this “new world gold market” much value in trade at high levels. Look even at your “Comex”, and divide the daily volume by the “eligible stocks for delivery”. That number (perhaps three million ounces divided by 150,000 stocks), deliverable, times the spot close gives close, real world price of physical, $6,000. It follows close to paper trade on LBMA.

You see, “physical gold is of much greater value than public traders can move it for”! In your world, this cannot be, but it is, and will show for all to see in your time.

Date: Sat Apr 25 1998 22:55

ANOTHER (THOUGHTS!) ID#60253:
It is true, that in times past when a currency is inflated (over printed) to a point of only 10% real gold backing, the government could revalue gold upward and the currency was 100% backed again! A terrible blow to the holders of this paper, but at least the money system survived! Today, the world’s currency, the US$, by default, would require a gold price of many, many thousands to back it without using its citizens as collateral! The only problem with this is the US gold stock is so small, that even at $10,000/oz, a large deflation would be necessary to decrease the outstanding US currency to this gold backing level!

Now, consider the Euro. It will have much real gold backing from the beginning. Even at 10% to 30%, the Euro will be the equivalent of a 100% gold backed dollar, when the world comes off the dollar standard! The selling of old dollar reserves alone will reprice gold in US$ terms of at least $6,000/oz! Its present interbank reserve value.

5/5/98 ANOTHER (THOUGHTS!)
The BIS is the gold broker for all interbank sales/purchases. Bullion Banks are for sales to other entities. I think, at first, China was leverage against the oil producers. Then Arabia was allowed into BIS for Euro.

6/14/98 ANOTHER (THOUGHTS!)
Sir, The history of “Hot” paper money does show it to “burn easily” from ” much heat”! If you read my Thoughts in today’s replies, we see much “fuel” in dollar derivatives trading in foreign markets. Much of this trading represents a “claim” on physical gold that may become “a transaction for physical gold” as dollar reserves are displaced. The $6,000 valuation of gold can only be true if currency deflation destroys enough dollars to bring it down to that range. Without deflation, the dollar will be devalued much lower than this (higher gold price)! Once the Euro is created and begins to effect world trade (late 1999 perhaps), the gold market will begin a transition as never before! I think it will be interesting to follow the politics of this change, yes?

Your question of Euro gold backing? The Euro will not be backed or fixed in gold. It will be the first “modern currency” to hold true “exchange reserves” in gold. It is important to understand that “exchange reserves” of gold are much more powerful a tool for currency defense than gold backing! In this system, gold must be traded in a “public physical market”, in that currency, Euros! As such, the Euro can “devalue gold” (Euro price of gold falls) thereby making it strong in gold! In today’s world, this will happen as a “strong Euro physical market” displaces and defaults “the old dollar settlement paper gold market”! The dollar will become”weak in gold”!

I assure you, there is much more where that came from. But the point of these quotes I selected is ANOTHER’s implication that $6,000 was the “interbank” –meaning interCENTRALbank– valuation of gold back in 1998, while the ordinary market price was only $300. What do you think the extraordinary price is today? The market price has gone up 4x. Has the interCENTRALbank value gone up to $24,000/ounce?

Not much has changed since then on the central bank money printing front. At least nothing in the direction that would imply a lower multiplier. Perhaps the BIS price is actually up 5x. Is that possible? $30,000/ounce if you want 200 tonnes of physical gold? Sounds like a lot of money, but it’s really not that much if you can print your own money!

The other thing to consider here is the presently thin customer base of the BIS. If this market were to reconnect with the public like it did in the 1970’s, meaning if the public were able to buy and sell physical to and from the central banks, where would the price go? Would it plummet? Or would it skyrocket? I think the answer is clear. Even the higher BIS “interbank” price is a false market construct.

So what does this mean for the euro? Well let me ask you this: Why was the euro conceived in the first place? The ECB’s own website lists “the road to the euro” as beginning in 1962:

1962 – The European Commission makes its first proposal (Marjolin-Memorandum) for economic and monetary union.

May 1964 – A Committee of Governors of central banks of the Member States of the European Economic Community (EEC) is formed to institutionalise cooperation among EEC central banks.

I believe Alexandre Lamfalussy, who I mentioned earlier, may have been “on this road” 5 years later in 1969 when he wrote:

“On the one hand, I would like to see gold lose its monetary function; on the other, however, I would not like a national currency to assume the role of a reserve and international currency, that is to say, that the unsteady gold-exchange standard be replaced by the dollar standard. Consequently, I would like that the demonetization of gold takes place alongside with the creation of an international reserve currency. At the risk of repeating myself, I would emphasize that these are my wishes and not my forecasts.

“…It is this same mistrust, which made it impossible for the gold-exchange standard to function properly and which therefore led to the “negotiated” creation of reserves. Seen from this point of view, the establishment of the two-tier system is an act of despair, the survival of which is more than doubtful. Instead of a decline of the monetary function of gold, we are on the road to more frequent monetary crises, to exchange restrictions of all kinds and finally to a collapse of the economy–which could be avoided only by the reestablishment of the gold standard.”

Again, from: The Role Of Monetary Gold Over The Next Ten Years

Lamfalussy went on to join the BIS seven years later in 1976 where he remained until 1993. From there he became the founding president of the European Monetary Institute in Frankfurt, forerunner to the ECB. And from 2000 to 2001 he chaired the “Committee of Wise Men on the Regulation of European Securities Markets”.

I read a great comment the other day that said, “The only true hope at this stage of the game is some kind of miracle that would produce sufficient real wealth in excess of our compounding debt loads.” The revaluation of all the gold reserves in the world at the true price discovered on a physical-only global gold market would be just such a miracle. And with the ECB “Mark to Market” policy and the eurosystem gold in place, the euro is built to receive just such a miracle.

Now I might be completely wrong. I suppose it is possible that all the wealthy sovereigns and overflowing central banks of the world are so benevolent as to withhold their bids for actual physical gold from the LBMA and the COMEX and patiently wait in line for a few scraps from the IMF. It is possible, but is it probable?

It is also possible that ANOTHER was just an Internet crackpot looking for attention. I suppose such a person could persist in capturing people’s attention for over four straight years of writing and then have his words carry on for another eight years without being debunked as a complete crank. It is possible, but is it probable?

All I’m suggesting, dear leaders, is that you might want to look into this. Do a little digging, so to speak, while you still have political careers that allow you to dig into extraordinary things. You might be surprised what miracle you will find.

Sincerely,

FOFOA

Written by aurick

13/05/2010 at 10:55 am

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