Tuesday, April 19, 2016

A $ystemic Upgrade

It appears that Jim Rickards has been following IMF policy closely enough to carve out a fairly plausible depiction of where the next Smithsonian type agreement is headed. He has also finally come to the realization of gold's role in the next systemic "upgrade". What I disagree with is his basis for "repricing" gold in order to re-liquefy currencies, based on money supply.

I think he will eventually re-think this and come to the conclusion that international FREE MARKET supply and demand factors for gold will be the more powerful price setting mechanism than any static money supply "fix". To allow price to emerge as a result of free market bidding - that old fashioned notion where suppliers do not relinquish gold until the price reaches an offer that makes good business sense - is the more genuine test of an unencumbered price setting market.

As Jim clearly understands (and remarks) supply is extremely tight with Switzerland's refiners, and at today's "price" demand from the East cannot be met. In a free market, prices would rise until demand cools. But as Jim infers, miners have no clue the power they possess - they will supply at any price they can operate in, and therefore the price remains just above production cost. Collectively, until they are nationalized, most mining companies will never fully realize their lost opportunity (as A and FOA have so often remarked) but that is another post for another time.

PBOC chief Zhou Xiaochuan does seem to agree with the Rickards viewpoint, as does IMF head Christine LaGarde, in her recent tribute to Christian Noyer. Again, though it is never really said verbatim, the SDR based systemic "upgrade" is expected to reduce capital movement volatility under the current exchange rate regime, to wit:
Christine Lagarde, Managing Director of the IMF, on Thursday praised the improvement of China’s policy communication regarding the exchange rate policy. “We have been delighted to see the communication efforts undertaken by policymakers, particularly Governor Zhou,” Lagarde said, “I think when it comes, in particular, to the exchange rate regime, it does clarify the situation for the better, because nobody likes uncertainties, markets in particular.”
Will the SDR "upgrade" render the FX markets irrelevant? No, I do not think so. Will it curb the competitive devaluations which A, FOA and FOFOA (and Rickards) refer to as the "currency wars"? Presumably that is the intent. But as Rickards makes the case for gold, he recognizes that while currencies will always be a component of modern monetary function, there must be an "unprivileged" (i.e. equitable) basis for regulating the international weight of currencies beyond the current FX regime.

That basis however is not a new price for gold calculated upon money supply, but rather the purchasing power of currencies to buy gold at free market supply and demand prices. If Rickards recalculation based on M1 wakes up a few miners before their respective governments appropriate their mines, all the better.

After all, how can demand for an asset be truly realized when that asset's function is not even understood by those who produce it? Today, the West sees gold as some sort of frivolous commodity. But the East understands gold as a way to save the world from a global "death by debt" systemic collapse. Even LaGarde recognizes the inevitable and obvious conclusion:
There is also an inherent debt bias embedded in the global tax system. More generally, the international monetary system would benefit from a higher share of equity compared with debt flows.
How does one value the single asset which alone is in place standing ready to save the world from systemic default? In China, the little people own it today. In the future, most will never know the weight of an ounce of gold in their hand, and many who do will trade that gold away to extinguish debt for a better life, and the freedom it brings, as gold held becomes once again the purview of Giants.

All this when a free market in gold comes to pass. The demand for it, as it extinguishes trillions in old system debt, will be priceless.


  1. "Priceless..." I know FOFOA estimated $55,000. Has he updated that number? I have read some saying as much as $100,000 or more, depending on how much of an equity margin the big banks would like to have. Not sure I understand this well enough to have any confidence... And I wonder how it could possibly bid that high. The China fix started today, perhaps they will have a role?

    1. Perhaps ... and perhaps also the international bid price of gold will be inverse to an international aversion to debt (the dollar).

      When debt defaults it is worthless, and it takes many many units of debt to buy equity (gold). This is good for everyone, because everyone holds too much debt and it will not take too much gold to extinguish it. After all, counterparties could just default, but if so little gold keeps the currencies alive, why not?

  2. It simply doesn't make any sense if the upgraded SDR would be the new global reserve currency and it consists of nothing but a basket of unstable fiat currencies which have already been overprinted.
    I believe US, UK, Japan, China and EU will soon have their own Gold Exchanges which fix the gold price denominated in their own individual currency. If the gold were priced incorrectly by any one of these exchanges, an arbitrage would create a gold flow which would self correct the problem.
    I think the five nations which make up the components of the SDR would have the privilege to get the first pot of fresh playing chips (SDR), providing they would deposit 10-20% in gold and 80-90% in their respective currencies in exchange for the SDR. The more gold a nation would deposit in the IMF, the bigger the piece of SDR pie would be in the bank's reserve.
    Any country which get stuck with the dollar can only spend it in the US. Hopefully, these countries would invest these returning dollars in factories rather than real estates or gold.

    1. I think you are on the right track ;0)