Foundational Gold Trail Commentary

The Inside Story on the Gold-for-Oil Deal that could Rock the World's Financial Centers

Friend of ANOTHER
(Mon Aug 10 1998)

Michael Kosares,

It has taken some time to send this, but now I can also offer my thoughts to your questions.

Your statement: "As a matter of long term policy, do you believe that ECB will "sell" gold to defend the Euro or "buy" gold to defend the Euro? Each of course would entail a different course of action with respect to reserves of the new national bank. Along these lines,will ECB buy gold from its member treasuries, or will it simply force them to transfer it to ECB coffers if needed to defend the Euro? I am prompted to ask this question in view of your assertion that there will be much selling of Euros to defend the dollar. If the Euro, as you suggested, is being printed to buy dollars isn't this just another manifestation of the U.S. exporting its inflation? It appears to me that the Euro will need to be defended -- and not with dollars -- but with gold! "

Michael, I believe the most difficult part in understanding the modern gold market is overcome by seeing all the various political factions involved. Essentially and basically, the largest pro gold groups are those who want a world currency that is not subject to the performance of the American economy. At this moment and in this period of economic history, all currency reserves held by foreigners (non-Americans) is a debt of the US Government and by extenuation through tax collection, a debt based on the ability of the American economy to function profitability!

In essence, America has told the world that as long as the business of this country is functioning, your wealth, as represented in Marks, Yen, Pesos, etc. is backed with performing US debt. It's like saying, "as long as your neighbor, next door, does not loses his job, you will not lose all your money! Most people would be surprised at how clear this is, outside the USA sphere of influence. This, the largest of the pro gold group, is largely made up of countries with economies that have no need to sell most of their production to the US. The business of these communities would not totally fail without the American engine. Yes, they would slow down, but not collapse, as trade with other countries would continue. To add what was said before: If your neighbor loses his job, you can still trade with the other people in the town, as long as the currency system is not based on your neighbors debts!

This group, made up of much of Europe and the Middle East, is not looking for a return to the old Gold Standard, but perhaps something far better. They do not see any advantage in holding the currency bonds of one country, as a reserve asset of future payment, over holding physical gold as a reserve asset in full payment. The fact that the debt reserve asset pays interest is little more than a joke in these banking circles. Any paper currency, the dollar included, can fall in exchange value against your local currency far more than the interest received! In today's paper markets, the only true value in exchange reserves, held by a government as currency backing, is found in it's effectiveness for defending the local currency from falling against other currencies. In other words, use the reserves to buy your countries money. But, this is a self defeating action as sooner or later the reserves are used up! This fact is not lost on many, many countries around the world, as they watch their currencies plunge, lacking reserves as defense. Ask them how important the factor of earning interest on reserves is under these conditions.

On the other hand, buying gold on the open market, using your local currency, works as a far different dynamic from selling foreign bond\reserves. This action takes physical gold off the market, and in doing so increases it's value in dollar terms. Gold is and always has been the chief competitor with the dollar for exchange reserve status. The advantage here comes from the fact that governments do not run out of local currencies to use in buying gold, as opposed to selling foreign currency reserves to buy the local currency on the open market. Of course, the local price of gold goes sky high, however, in this action you are seen as taking in reserves, not selling them off.

Also, as gold begins to rise against the dollar, the local gold reserves are seen as assets of increasing value, backing the local currency. Under these conditions, with a stable currency, citizens will purchase more gold as it is seen as a positive asset. Not unlike a rising stock, everyone wants an increasing investment. Contrast this action against that in Korea, where everyone sold gold as it increased in an unstable currency!

Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold. Michael, you are absolutely correct in that the USA will see a hyper inflation of it's currency and a gold price in dollars that reflects it. Unfortunately, for most investors, the gold price rise will be sudden and also hyper fast. as it will occur just after a rapid plunge in dollar based assets including, stocks, debt and the entire banking system. This action will destroy virtually all gold based paper assets as they are also dependent on a functioning economic system. A local gold mine, in any country, must sell production to realize a profit. The contract system they deal with will not be functioning during this time. Contrary to many hopeful investor, local treasury officials will not allow miners to pay employees or buy equipment with physical gold. When the dust does clear for mining to continue, gold will be recognized worldwide as real money, and the mining of money will, no doubt, carry Extreme taxation. Stock prices of these operations, after being priced to zero, will then double or triple in price. Zero times three equals?

Back to your original question. The Euro will not replace gold, it will evolve into a gold transactional currency. It will also price Euro gold very high, perhaps $6,000 in current dollar terms buying power. However, in actual dollar terms of the future, $30,000 US will reflect the American debt as the negative reserve asset it truly is. The ECB will have an easy time issuing Euros to buy gold from the member banks. The real political warfare will be in trying to force them to sell the gold at all, once this ball starts rolling. 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 tonn of gold from a Bullion Bank. The BB borrowed this gold from the CB (leased). The one tonn 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!

Now when we look at this picture, who is at risk here? The Euro CB Group still holds the physical gold and will buy it back from the new owners, if asked, using printed Euros. The new gold owner has just replaced his dollar reserves with either bargain priced gold, or Euros at an exchange rate never to be seen again! Some of this was done to buy the pricing of oil in Euros. The BB owe the CBs 14,000 tons of gold that they must collect inthe future from producers or currency speculators. And they must collect it by paying what will be a, then, ridiculous price of $300/$400US, while the world market price will be, well, a little higher.

With Canada, Australia, and perhaps England having sold much gold to hold US$, much of the English speaking, IMF/dollar world is about to change. Any country, Japan, Mexico, etc., that has locked their future by selling most of their production to the American economy , is headed for a depression. Another is answering some of your mail questions and is also sending a letter. Will send it on arrival.

Thanks Michael,


(Tue Aug 11 1998)

Mr. Kosares,

Part of my replies:

From David J. Powell: If China were to devalue the yuan, what effect would it likely have on the US$$ gold price and why?

ANOTHER: Mr. Powell, In China, persons own gold for reasons that reach far from the past. They see the price of gold, in dollar and Yaun terms, not as gold value rising or falling but as these currencies rising or falling. As such, gold is viewed as "the stable wealth" and currencies as the "changing asset value"! Not unlike the Dow Jones stocks, always moving, so it is of the paper currencies of today. . Much is written of how gold does not come to China, as it is "expensive" and "citizens have no money to buy"! I say, they have money, just not your paper money, as they were taking in gold from before the birth of currency and will do so till the end of time! In that country, China, where gold was purchased in great quantities, from before the existence of America, this will not change if the Yuan is devalued.

What will change is the currency China uses in world trade. They have yet to "secure" the Euro against their US dollars held in Hong Kong. They will make this trade for the benefit of their "old trading partners" that ended with the "Orient Express"! If traders sell gold as the Yuan is devalued, I think that gold will ride this train route to Berlin, Yes?

Thank You


FromTatusko: ANOTHER, What currency, besides gold, do you view the world from. Your statement "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)!"

An American perspective would appear to be "The only way the price of gold will stop at $6,000 is if the Federal Reserve is successful at stopping inflation at that price. If not, the inflation will be much worse, and the gold price will go much higher.

You speak in terms of what currency? Euro's, Swiss Francs, or ANOTHER? What is your future outlook for the Swiss Franc and Swiss Annuities? Will Swiss Francs continue to be the strongest currency?

Thanks. Sincerely,Don Tatusko a.k.a. ShortSellr

ANOTHER: Mr. Tatusko, At present, I, like you, must view the world thru dollar. The "world reserve trading currency" it remains! All persons hold dollars, be they as the "proxy" currencies of other countries, or other assets worldwide, all things find value thru the "debt securities" of American citizens! It is, the ability of the, "factory worker" in Detroit, to pay the mortgage that does make your, say "Pounds", of value in world trade. It is the way of the IMF, Yes?

I think, your "American perspective" does not see or know or understand, how the dollar is "already much inflated" worldwide. Your Western thought is only of the "dollar price of things" at present. It is to say, "if prices do not rise, there be no currency inflation", and "see the world competition for selling goods and services in dollars, this brings no price increase"! This results from the current world currency system that does force the "holding of dollar debt" as reserves. A new change in this system will release these reserves, for the spending and the buying! It is during this change that American persons will find a "new price inflation" from a "existing currency inflation". In this time, the "competition for selling goods and services" will become " the competition to buy goods and services" in Dollars! You see, it is as you say, "your chicken has roosted for some time, but only now you find he has come home"!

If a depression does arrive to America's main trading partners, Canada, Japan, little Asia, Mexico, etc., it could destroy many of these " roosted" dollars and hold the dollar price inflation to, "only extreme". Of this point, perhaps $6,000 gold will be enough to represent the extent of past "overprinting".

Also, you ask an additional question:

ANOTHER, You emphasize buying physical gold, and you have also said there may come a time when the US Dollar is not convertible into gold. What do you believe will happen to those who are long gold futures on the COMEX. Do you believe the COMEX will default, or will these people be able to pay off 10 lifetimes worth of 1998 US dollar denominated consumer debt?

Thank you. I enjoy your THOUGHTS very much.

Sincerely, Don Tatusko

Mr. Tatusko, In the event of a major increase in gold price, I do not think the persons on the other side of any large gold contract will have the resources to deliver cash in a settlement. Perhaps they may deliver the physical metal if it is in account? I ask, if you have "leveraged" an account for the "short side" by 200%, and the market moves against you, "overnight" by 1,000%. Could you complete the "most honorable" contract? " plan not your sail for the calm day, as a strong wind may change your landfall"

Thank You


From Aragorn III: I recently posted the following for the Kitco Gold Discussion Group. I would be grateful to know its merit under the scrutiny of ANOTHER.

Date: Tue Jul 21 1998 20:19

Aragorn III ((THOUGHTS!) by ANOTHER...I certainly DO like the way the numbers play out) ID#212323:

Gold is effectively revalued to $1,800 per gram, or equivalently $56,000 per troy ounce ( ballpark figures ) . Perhaps that sounds preposterous to you, but I submit that it is not. What does sound preposterous is that an institution can take paper and ink with very little effort and assign/create whatever value they choose. What is to stop this same institution from throwing a little gold into the deal as an accounting tool---THOU SHALT NOT CREATE ( from this day forward ) A DOLLAR OF VALUE ON YOUR LEDGERS WITHOUT FIRST GAINING POSSESSION OF .00055 grams ( .000017 oz ) GOLD.

Think about it. The institutions (Central Banks...particularly the ECU) are free to do this, and what's to stop them. The citizens certainly wouldn't complain. Suddenly their paper money would have an inherent value, not just a confidence-based value. This scheme to end USDollar hegemony is nothing short of brilliant. Too often the forest is not seen because the trees do get in the way. Individuals often see a situation as us ( people ) against them ( Govts, CB's, etc ) when in fact the battle lines are drawn in unexpected places, allying us ( people ) with some of them ( CB's such as the ECB ) against the rest of them ( the US Govt ) . Accept it.

Any right-thinking individual should easily see that gold is the great equalizer in the world of international economics. No one can be cheated when value is exchanged for equal value in the marketplace--whether domestic or international. The problem we face today is that few people recognize value...they have for too long been lead to believe that paper with ink has value according to the design and country of origin. They do not recognize the true value of gold ( as money ) as a store of wealth for the future purchase of items in need.

I shall not mince words. When I refer to a Dollar value you may equate that with a Euro value as they are nearly at par with each other ( as currently perceived ) . There is approx. 1,400 Billion dollars of total currency value on account among the 11 European Monetary Union member nations. For the launch of the Euro, it was decided that approx. 50 Billion dollars in value would be held in the European Central Bank as foreign exchange reserves. ( Please notice that you don't hear much talk about what percentage will be held in any specific nation's fiat currency...all attention is on "How much will be gold," as all paper is for appearance only, as I will further explain ) . To announce that 15% of the reserves will be gold is to say that the ECB will hold approx. 25,000,000 ounces of gold ( 25 Million ) as backing for the 1,400,000,000,000 dollars of total currency value among the member nations.

The Euro will NOT be a fiat currency if this ratio is maintained for any future "creation" of Euro dollars by the ECU. Think in these terms: a new measuring system has been created for gold to supplant the troy is called the Euro. The Euro is the mass equivalent to .00055 grams and also .000017 troy ounces of gold. As an individual, you may choose to hold your wealth in raw, bullion form, or for spending purposes you may exchange it for equivalent receipts ( called Euro's ) in coin or paper form. ( It is simply not practical to use physical gold as money...a coin of only one gram would be worth 1,800 Euro's (and notice here I do no longer state the value in dollars as the true USDollar would be worthless ) . ) Inflation is arrested as the gold reserves grow in proportion the circulating currency...the money in circulation, when tallied, represents the total weight in Euro's held by the ECU.

It had to be done in this round about way...both to buy time and to facilitate a smooth transition. Imagine the pandemonium if the ECU announced simply that 25 Million ounces of gold ( worth 7,500 Million dollars by today's misguided notions ) would be held as the sole exchangeable reserve ( payable on demand ) for 1,400,000 Million currency units called a Euro that each individually represent a modern-day purchasing power that is on par with a dollar. They would be ridiculed and laughed into extinction. Further, apparent disparity would result in a pricing turmoil. The typical citizen and shopkeeper do not know how to value things outside of the monetary system that they've grown accustomed to. If asked to price things in gold, they would make the mistake of using the spot price, which is currently far too low to be used for a worldwide monetary exchange rate. So instead, a grand production was made that approx. 50 Billion dollars of foreign exchange reserves would be held, and that 15% would be gold...that is to say, 25 million ounces. The citizens will be gently lead into the new age of a worldwide as money. Nations with gold or abundant resources for international trade will no longer be held hostage to the nation with paper that is stronger than all other paper.

You will agree that gold as money could be accomplished smoothly in NO OTHER WAY THAN THIS. Meaningful wealth on the world stage would be predicated upon how much gold an individual or a nation owned. It is better to trade your dollars for gold now, at the misguided exchange rate of $300/oz, rather than move into the new era with only the paper in your wallet or the digits in your account. On the open market, with a Euro and a dollar's purchasing power on par ( initially ) , it would not take long for gold to reach the exchange rate of $56,000 per ounce as people tried to take advantage of the arbitrage opportunity.

Yes, I do like the way the numbers and the rationale add up. It wouldn't be me if I didn't ask... got gold?

[And a follow up post was directed to someone who felt that there would be a consumer pricing crisis; and also the possibility of another gold-rush whereby people would quit everything to try panning their own gold]

Date: Wed Jul 22 1998 10:26
Aragorn III () ID#212323:

I think it is quite possible that when orchestrated as I've crudely presented, an official monetization of gold does not necessarily lead to a pricing chaos as you've suggested...$400 for a gallon of milk, $200 for a dozen eggs, etc. The only arena in which the dollar plunges in purchasing power is with gold. The institutional assignment of the gold value could for all practical purposes be transparent to the average citizen and shopkeeper. Only those relatively few individuals who possess physical gold would see the world through altered eyes...rejoicing in their forethought to own gold while the rest of the world was enamored of paper.

It would be expected that nations would quickly establish restrictive mineral rights laws that would heavily tax or otherwise control the future mining of gold to the Govt's best interest. Mining operations could very well relieve citizens of their individual tax obligations. And no nation could continue with the practice of creating money value from thin air.

Thank you for your effort to help "fill in the blanks" on gold's role in the esoteric realm of international economics and finance.

Aragorn III

ANOTHER: Mr. Aragorn, I offer my "Thoughts" to all and encourage persons to think, consider and discuss this new gold market. During our journey in life, it will be the "world events" that truly "fill in the blanks" as this "economic drama" unfolds! History does shown, that over time, wars are won with an ability to reconsider, and to move and change course. Perhaps this war of "money" is not located on the fixed ground of past thought, but will be waged in the fluid minds of men as they seek to defend their life's savings. I send your writing to the eyes of others, that they may also, engage this enemy, with the thought of keeping our families wealth!

Thank You


From Terry: Michael, If the Euro is to be introduced at a one to one exchange rate with the USD, wouldn't it be in the rest of the worlds best interest to keep the dollar up, and keep the price of gold down (in USD terms) until the switch can be made to Euro's in '99. Since so many countries hold USD reserves, they wouldn't want to see a drop in their assets before they could convert them. It looks like the European CB's would have a huge interest in keeping gold low against the dollar, thereby making their currency very strong in gold terms at it's introduction. Then the Euro could (will) leave the USD in the dust. Is this paranoia on my part, or is it just to scary for the mainstream financial market to talk about?

God forbid, but this is the kind of stuff wars are made of.
Yours truly,

ANOTHER: Terry, Please read what is considered here. Ask others and counsel elders of past money wars. We will watch this new gold market together, yes?

Thank You


From Carlsen: ANOTHER, my head is spinning reading your replies. I read them and I reread them. However, my question is. For us small investors sitting with losses from our investments in Gold Producing Mining Companies are there any hope for us to make any money on our investments or should we take the losses and buy the gold bullion?

ANOTHER: Carlsen, The gold has a history of many thousand years. It is not for "the investment", it is as the "conclusion of wealth". Other items will always rise and fall against gold. The value from investment in "commerce" is truly found in the production of people. This be not the same as the enduring wealth of a "world class money"! Gold in both hands lives by no rules of man, as does the business of trading nations. Portion your investments as you thinking will allow.

Thank You

ANOTHER: Mr. PH in LA, Sir, your letter asking of the Gold Carry Trade, I did read. Perhaps the letter from my good friend to Mr. Kosares as posted does help your thinking? Many persons do trade this gold currency for reasons and purpose we may never know! It is the ways of men to lose the "wealth of nations" for gain of the few. Always, some win this game of kings and show this prize as proof of direction. And always, as night becomes day, these gains are returned, in quiet hidden places where "eyes do not see"! As we watch this new gold market, we trust what is real, yes?


Thank You


(Wed Aug 19 1998)

Supply And Demand for Gold; Does this change the value of this "Metal Currency"?

I ask, why do many look to the "commodity" supply and demand of this element for direction of price? The use of gold for jewelry and other fabricated forms is but a small amount of the buying and the selling. The mines do produce perhaps 2,500 tonnes a year, and "fabrication demand" does use perhaps 3,000 tonnes. Yet, all look closely to see if the usage does change and move the price up or down. However, the "fabrication demand" has been much greater of the mine supply for many years and the dollar price still falls!

Truly, the selling of 3,000+ tonnes of gold, for the making of things, does not influence the dollar price of an item of that trades 13,000 tonnes a year at LBMA alone! And the gold does trade much greater amounts in the small places of which you have little knowledge. Perhaps this "metal currency" is used for "the money transactions" as 20,000+ tonnes per year? The Central Banks still hold a billion ounces of gold:

Does your broker of "leverage gold" tell you these banks watch the "jewelry production" for the intent to value gold reserves in vault? Do the other holders of perhaps, two billion ounces of gold, held worldwide, also look for "fabrication demand" to raise the price? Do the billions and billions of currency/gold/swap transactions all see value only if "jewelry" is selling well?

My friends, events will change your thoughts. Often you are sold gold that is called "deliverable", yet the broker does lend you much percentage cash to buy. Perhaps this transaction is "deliverable after full payment" and as such the broker doer deliver "little real gold", yes? Much of the western world does "attach" to gold in this form. This metal is sold with the "modern concept" of "gold is the commodity for fabrication" and "is dead as money" in "this new era". This "concept" say that only "leverage" and "trading" does add to your estate. In this fashion, many have lost the long term benefits this "world class money" will soon bring. These persons wait for the event that does not come. In the future, many "salesmen of leverage" will tell stories of the fact that could not be. "The demand for gold "the element" will vanish, as the dollar price for "gold the money" does soar". What chart will be used to view this new high gold price, that will remain, for many years, "unaffordable" as a commodity, yet all bid for daily as the right to buy "money"? In this future time noone will deliver a leveraged commodity that has become, "leveraged money", no? The physical gold, it will trade by the dealer that has seen the Euro as the gold and oil settlement currency of worldwide use. Many will learn the price of gold in Euros, as even the American Eagle will be quoted as such!

Canada does continue to sell, however they lust not for the Euro! Perhaps the American dollar will change this thinking! Poland, the BIS did deliver them more gold for the future of their children. We watch, as the BIS does continue to buy gold under $360, for it's account, as they fill Central Banks with a new world currency reserve. Countries that now begin to think in Euro terms, find the dollar gold as "the good exchange rate" for joining the Euro Group in future! From spring of this year, this demand, makes gold be above $280? The ECB says, "this gold has been sold in dollar terms but has yet to replace the dollar reserves."

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


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