Saturday, April 12, 2014

The Seven Years Itch

Certain people who should "know better" are still waiting for the momentous "dollar collapse". How can it be that they still do not realize that this already took place in the Fall of 2007. We are now in the 7th year of the dollar collapse, and if the central planners of the "advanced economies" have their way, we may have many more years of gradual collapse ahead. Or, we could have the more rapid and visceral transition which "those who are still waiting" are waiting for.

As for the dollar hyperinflation that many are predicting ... that is ancient history. It is ongoing, and accelerating of course, with a few minor pauses (tapering) for political effect. But the expected price action upon things purchased with dollars is partly managed, partly hidden, and partly taking place. We seem to have lost sight of the fact here in the U.S. that the cost of gasoline, an essential and necessary resource used by all, has increased by over 300% in the last decade, and this does not factor in the dilution of ethanol, or the efficiencies of technological improvements that should be price-stabilizing.

But of course if we look at dollar inflation abroad, quasi -Weimars are everywhere in varying degrees. Will the price of things in dollars here in the States hyperinflate dramatically and quickly, so that bread goes from 2 dollars to 10 per loaf overnight? I cannot say. But I will tell you that central planners would rather for that loaf of bread to rise by about 50 cents per year, over the next 20 years instead. Can they manage that? The way things are looking today, I wouldn't wager upon it.

What I can say is that the developing BRIC economies are not willing to join with the advanced in celebrating current and ongoing lost decades as successful policy. For the debt-ridden economies, managed stagnation for many generations to come, briefly buoyed by (the prospects of) technology, is their best hope. The resource rich, gold-backed, producer economies are not willing to go along for that ride.

So I would say that Freegold, as a concept, has already arrived. Will it manifest as the new, dominant, global economic system? I cannot say.

But I can tell you how it accelerates.

It accelerates when that barbaric, post apocalyptic system of "barter" takes center stage. Yes, the currencies do not all have to "burn to zero" for barter to take place on a rather epic scale.

You see, when Russia agrees to trade oil directly for gold with Iran, this is barter. Currencies could be used, and they will be, just not the dollar. And this is not the first such recent agreement to take place. But a large agreement in barter has weight, especially when the dollar is not the reference point.

We do not know if the recently publicised "oil for rubles" agreement with China has a "gold kicker" in it or not. But we know that it would not be the first time such an arrangement was made. When the "cheap oil for dollars" deal was struck between the house of Saud and the US, gold truly was the reference point to make this work and create the petrodollar / OPEC standard. Then gradually the dollar became the "reference point through oil" from gold hidden in the mix.

Today, as markets struggle to be freed from the dollar trap, the dollar is abandoned in a continuation of its collapse. There is no use or even mention of the dollar in these "oil for gold" or "oil for ruble" agreements. therefore the old pricing reference point, the fading dollar, is lost. When one major currency is completely lost, so goes the exchange structure as we know it.

Therefore, what then becomes the reference point to objectively price the market for gold, oil, ruble, yuan? Consider that if you bypass the dollar, you bypass the forex as it exists today altogether. So how do we compare relative values to price the currency unit in trade?

Is it not the deal itself my friends, the negotiated agreement, thoughts about relative value sans the dollar, which determine price?
Let me explain ...

In a truly free market, a buyer and a seller are free to use their own thoughts and opinions about relative values in a trade. Yes, when Russia and Iran negotiate "how much oil for this much gold?" we in the West would use the dollar as the reference point. We will say "oil cost X in dollars" then we say "gold cost Y in dollars" and from this we extrapolate how much oil to trade for how much gold.

But in the East, this is not how it is done today. Instead, we say, "I propose this amount of oil to be traded for gold. How much gold will you give for this much oil" If oil uses the dollar as a reference point, then Iran is a fool. But when we come to an agreement without the dollar, we have a new reference point, the negotiated price of oil in gold, in such amounts, on this date. Not a hard concept for a Freegolder to understand, considering the acceptance of a bifurcated gold pricing market at large, private deal volume levels.

Here we have participants deciding relative values in a market free from dollar influence. This negotiated agreement is now the reference point "oil in gold". Now we move to "how much oil for Ruble" using this new reference point. Yes this is a small start, but a move away from dollar influence nonetheless. If this trade is made for one million barrels the reference point is strong. If this same "value ratio" is made relative to other currencies, sans the dollar, for 100 million barrels, this new reference point is stronger still.

Meanwhile, the dollar, which gets it "reference point privilege" from the vast global use of dollars as the pricing mechanism for all things, diminishes in dominance as more and more trades are made without it. It loses it's use as the means of exchange, thereby further losing its function as the reference point for value.

In a free market, it is nothing more than "thoughts about relative values" between "how much of what I want" for "how much of this you have" that determines the relative trading values. Currencies are merely units used to efficiently complete the trade. In a free gold market, with gold as the reference point for trade value, currencies accurately reflect their more fungible and liquid "trade completion" utility by being correctly valued relative to gold.

Part of the dollars exorbitant privilege is it's preferred use status not only as the unit of exchange in trade, but also as the actual reference point for value itself. Remember that it earned this status through its fix to gold. It loses this status through the mismanagement that always follows a fiat currency delinking from gold.

It maintained its reference point value status through a fractional paper gold market which fooled many into believing that a free market in gold did exist, and that the freely convertible status of dollars into gold protected holders of the dollar.

But we know today that the public dollar price of gold is managed for political purposes, and therefore many foreign dollars are being exchanged for gold in this current "deal of the century" where gold is still publicly traded for paper promises that we know cannot be met by the issuer.

Is this the beginning of FREEGOLD? Yes, it is. But will FREEGOLD be the dominant, or even singular system post transition? I cannot say.

However, some do believe that the flow of gold will stop at the top of the physical supply chain, where large amounts trade, and a great and powerful collapse of the status quo will take place based upon that event.

Perhaps. But I think the circumvention of the dollar in larger and larger non-dollar deals involving energy, BRIC currencies and gold will be more imminent, and serve as new free market reference points of value, where gold and oil correctly value the currencies used, and the dollar (and its debt faction) is irrelevant.

As we considered in the last post, the BRICS have enough gold, oil and industrial capacity between them to create a vibrant, circulating freegold based energy economy, leaving the advanced economies to "trade among themselves within their own absurd sanctions".

If the new FREEGOLD based trade agreements take place on larger scales, and with greater frequency, you will see the current forex market collapse as the "dollar structure lost as we knew it" and a new foreign exchange market which prices BRIC currencies relative to one another, with oil and gold as reference points.

I do not know which will come first, physical gold markets as the new pricing mechanism for physical gold, or equity based forex markets as the new exchange rate mechanism for currencies backed by negotiated oil and gold trade values. But I do know that one cannot live without the other, and both are trying to form as I write this.

And yes, as this transition takes place the war machine of the developed nations, their final weapon with which to maintain control of the status quo, could be activated as last resort.

I cannot predict the future, I only know which future I prefer, to satisfy this 7 year itch.

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