It's the Flow, Stupid

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."
(ANOTHER, 1997)

All the gold in the world is a fixed quantity. It always has been. It just gets moved around like poker chips on a table. Some of it is still in the ground and some is above ground, in portable form. But it is all owned by someone, underground or above. If it was sufficient to simply trade paper ownership certificates then there would be no need to pull it out of the ground at all. We could just estimate how much was down there and then trade ownership rights. But it is not sufficient, especially for cross-border trade. Never has been. And this is why we pull it out of the ground.

In the monetary roles of 'numéraire/accounting unit' and 'store of value', this gold has been the most reliable money the world has ever known. But those of us who are savers know from personal experience that gold need not be the medium between every single exchange. We generally work four months out of the year to cover the government's "cost of living," seven months to cover our own cost of living, and one month to add to our capital account, our savings. We really only need the gold for that last month's efforts. Debtors, of course, work those last months just to service their debts. So they don't need gold at all.

But for a saver whose income is derived from depleting his capital, like a gold dealer or an oil producer, the required flow of gold is a much greater percentage of gross receipts than a saver who, say, produces cheap goods for Walmart. While the latter might require a flow of 5% of gross receipts in order to slowly grow his capital account, the former needs a flow sometimes as high as 95% of gross receipts just to stay even!

Imagine a gold dealer who sells 10 ounces of his own stock for $14,000. He must then replace his stock and refill his capital account, so he turns around and buys 10 ounces for $13,500. He has just made himself an income of $500. His gross receipts were $14,000. And he required a gold flow of 96% just to keep his capital account even. Now think about the oil reserve owner. His oil reserve is his main capital asset, just like gold to the gold dealer. But oil doesn't get shuffled around like poker chips on a table. It goes up in smoke. So what does the oil producer use to keep his capital assets even? Promises?

Of course above ground gold is much more valuable than gold still in the ground. And likewise, value is added to oil as it is pulled out of the ground. It is now able to be sold, traded, refined and consumed. It is this added value that the oil producer uses to fund his lavish cost of living. In this way, the oil producer is more like the gold mine owner than the gold dealer, as the gold miner need only retain a small portion of what he pulls out of the ground to keep his capital account even.

Unpublicized gold for oil deals are nothing new. The first known deal was 65 years ago, right at the beginning of Bretton Woods:

To collectors, however, the most interesting Saudi gold coins weren’t coins at all; they were "gold discs" Similar to coins, they were minted by the Philadelphia Mint in the 1940’s for Aramco, and bore, on one side, the U.S. Eagle and the legend "U.S. Mint, Philadelphia, USA" and, on the other side, three lines on the fineness and weight. They looked like coins, they were used as coins, but, technically, they weren’t coins.

In the 1950’s, numismatists were puzzled by these "discs" until - in 1957 - the story emerged in The Numismatist. Aramco, required to pay royalties and other payments in gold to the Saudi government, could not obtain the gold at the monetary price fixed by the United States so the U.S. government specifically began to mint the "discs" - actually bullion in coin form for these payments. In 1945, for example, the mint turned out 91,210 large discs worth $20, and, in 1947, 121,364 small discs worth $5, according to The Numismatist. (Saudi Aramco World, 1981 print edition)

The coins were struck in Philadelphia by the United States Mint in 1945 and 1947 to satisfy the obligations of the Arabian American Oil Company, or Aramco, which had been set up in Saudi Arabia by four American oil companies. The company was obliged to pay the Saudi Government $3 million a year in oil royalties and its contract specified that the payment be made in gold.

The United States dollar at the time was governed by a gold standard that, at least officially, made the dollar worth one thirty-fifth of an ounce of gold. But the price of gold on the open market had skyrocketed during World War II.

For a time the Saudis accepted payment in United States currency, but by 1945 they were insisting that the payments in gold be resumed. Aramco sought help from the United States Government. Faced with the prospect of either a cutoff of substantial amounts of Middle Eastern oil or a huge increase in the price of Saudi crude, the Government minted 91,120 large gold disks adorned with the American eagle and the words "U.S. Mint -- Philadelphia."
(New York Times, 1991)

US Mints ‘Gold Disks’ for Oil Payments to Saudi Arabia
There is an extremely important point hidden in those articles. Can you guess what it is?

It is that the price of gold does not matter to the producer/saver, only the flow of gold matters. I'll say it again. The producer/saver doesn't care about the price of gold, only the flow. To the producer/saver the price doesn't matter because it is a straight currency exchange, like exchanging dollars for euros.

Did you see it in the article? Aramco owed the Saudis $3 million a year, but it had to be paid in gold. They didn't owe 2.67 tonnes of gold per year, but that's what they had to pay because the US fixed the price of gold at $35 per ounce. The US could have raised the price of gold to $100/ounce and then it would have only had to ship .93 tonnes of gold to the Saudis! Would the Saudis have been displeased with such a move? No. The guaranteed price of gold only matters to the printer of paper gold. To the producer/savers, all that matters is the guaranteed flow of physical!

Up until 1971 the US administered the flow of physical gold within the official international dollar banking system. If you were not an insider you paid sometimes as much as $70 per ounce for the same gold:
The bullion coins were crated and shipped to Bombay, where the $35-an-ounce American gold was sold for $70 an ounce. Most of the coins were melted into bars and later sold in Macao. - (New York Times, 1991)

During this time dollars outside the US were "as good as gold" while dollars inside were not. FOA called these internal dollars "Fiat 33" after the Presidential order of 1933 that made all internal dollars irredeemable in gold. Oil produced inside the US or even in Canada and Mexico could be purchased with "Fiat 33" dollars, while overseas oil required paper gold, redeemable in US Treasury physical gold. Even the Saudis eventually accepted the US paper gold, as long as a portion of it was regularly redeemed.

Then, in 1971, the US stopped the flow of official gold. What followed was this:

We all know why the flow of official gold was cut off, right?

Well, maybe not. Here was FOA's explanation:

FOA (12/5/99; 17:38:01MDT - Msg ID:20347)

The world did begin to walk away from the dollar! It plunged and remained on a downward trend for several years! The US knew their option was to raise gold prices prior to 71 (just as I offered in the last post). But oil was the major problem link! Every oil person in the US knew we were running out of local reserves at the old "gold backed" dollar price. All the Middle East had to do was wait us out as they were happy to out produce and supply us in exchange for "real dollar backed gold". You see, oil was and is the real driver of all economic production.

We could have raised the dollar price of gold to settle our accounts but that would not have raised the local oil price enough to make deep reserves available. Yes the dollar would have depreciated somewhat and foreign oil would have gone up, but not enough. The need for more local reserves and the higher dollar prices that could make them available is what drove the 71 gold window closure. They had us and we had them.


At that time we were buying local oil with "fiat dollars" (made so by the 1933 internal gold confiscation) and foreign oil with "gold dollars". But, as you pointed out, dollar production was so far past its "gold backing" that it was obvious they (USA) were pegging dollar printing to oil prosperity. Still, with London gold and oil mostly settled in dollars, the foreign dollar oil deals fully well expected to cash in unneeded dollars for gold. As we can see, reality and present day events of that time were as "mismatched" as today!


The US wanted new oil reserves to be "Local" (the Americas), because it could be paid in "fiat 33" cash, not the more golden "foreign cash". Both our neighbours to the north and south never asked for much gold. In this light they acted like the local oil companies that received post 1933 dollars for oil (as mentioned above). Yet, to get these new reserves for fiat 33, they had to prevent the very cheap Middle East oil from supplying it all.

Wow! So I think he said that the 1970's spike in oil prices was actually desired by those in charge of the dollar's management. That they had out-printed the gold reserves already and wanted to somewhat temper that development. Did it work out exactly as they hoped? Of course not. But that's not the point. The point is that the producer/savers need gold to flow. And the US cut off that flow.

Now obviously (at least I think it should be obvious to everyone) I believe ANOTHER and FOA were 100% credible. I believe they had some unrevealed yet deep inside connection to European central banking and the gold for oil deals in London that only a European central banker would know about.

But I do realize that most of you do not share my credulity toward these two. So I think that you may find this interview from last week somewhat intriguing. In it, John Defterios of CNN International's "Marketplace Middle East" interviews Sheikh Zaki Yamani, the Saudi oil minister from 1962 to 1986. That's right, he was the Saudi oil minister during the 1973 oil shock!

It's a short video and the relevant part is in the first 90 seconds. I'll even give you the transcript:

John Defterios: 1973, the Arab oil embargo, you were a key player during that process. The former US Secretary of State Henry Kissinger said it was political blackmail what Saudi Arabia and OPEC were doing to the rest of the world. In retrospect how did you see it?

Sheikh Yamani: Well that’s a very long story, and the reaction of America for what happened is not a one reaction. They decided to raise the price of oil 400%. They needed to help the oil companies to invest outside OPEC. In Mexico, in North Sea and so on. And this will not happen without a high price of oil.

According to Yamani, what happened in 1973 was twofold. There was an American plan, and also an OPEC overreaction. 1973 was, according to Yamani, the first time that OPEC flexed its muscles as an organization. From the full transcript of the interview:
Sheikh Yamani: Yes and there was an agreement between the Shah of Iran and between Dr.Henry Kissinger to raise the price of oil... I really highly respect Henry Kissinger. He is really a planner and strategically he is a man to be respected.
Is it true? I don't know. But I think it's true. Not because I believe Sheikh Yamani, but because I believe FOA and ANOTHER were 100% honest, credible and deeply resourced. And Sheikh Yamani happens to corroborate what FOA wrote eleven years earlier.

But whether or not it's true is beside the point, which is the same point ANOTHER made in his very first post, quoting his friend and fellow poster, "Hong Kong Big Trader":

It was once said that "gold and oil can never flow in the same direction". If the current price of oil doesn't change soon we will no doubt run out of gold.

Now you might think he was saying "If the current price of oil doesn't RISE soon we will no doubt run out of gold." But he didn't say rise, he said change. And it is not as simple as you would think.

From 1980 through 2001 gold did flow, though not in the efficient way it would in a free market. With the expansion of the gold forward sales and futures markets, the Saudis and the third world bought up all excess physical gold flow. As ANOTHER said in his very VERY first post, which is prior to even the USAGold archives:

September 14, 1997 by "ANOTHER"

The CBs are becoming "primary suppliers" to the gold market. Understand that they are not doing this because they want to, they have to. The [CB] words are spoken to show a need to raise capital but we knew that was a [smoke] screen from long ago. You will find the answer to the LBMA problem if you follow a route that connects South Africa, The Middle East, India and then into Asia!

Remember this; the Western world uses paper as a real value, but oil and gold will never flow in the same direction. Big Trader

"South Africa, The middle east, India and then into Asia!" This was where the physical was flowing while we, in the West, were becoming enamored with paper gold trading. No longer did the US Treasury have to supply ITS gold, the market was supplying gold for it. But keeping the physical flow bought up, cornered as it were, was putting a great deal of stress on the paper market of the LBMA by the mid-1990's. It's all about the flow remember, the flow of PHYSICAL that is. FOA:

FOA (12/04/99; 21:34:03MDT - Msg ID:20282)

Earlier this year, old bullion supply dried up and it looked like the last of the private "old stocks of gold" had finally run out. Then the price shock from the Washington Agreement flushed out some more. I've written on this before (and ORO told it better than I), but the more the old holders sell out in return for holding "unallocated gold accounts" the worse the shortage will be when the marketplace fails. Slowly, over many years, the people that now hold the real bullion that was sold to create a lot of paper gold, have literally locked up the ownership. The old liquid gold market we used to know in years past functioned because of all the private physical holders that traded it. Now, it's all paper being shuffled around.

This gets back to your LBMA item. The old, deep private bullion pool has been replaced with a paper commitment pool. In the past, if someone defaulted, we just grabbed their bullion. Today, if they default, they just default! Again, if that big African mine does tell them to take a hike, the whole modern gold market could just collapse. This is why I smile when I hear someone question why the big funds and traders don't just take delivery against OTC paper. The question is just exactly what are they going to take delivery of?

All the gold movement is just for show. Same for Comex. Sock a little gold in there and complete a few deliveries so it all looks right. It's all the same game we played with the dollar before 1971. Only when everyone asked for delivery did we find out that the world was awash in paper gold,,,,,I mean dollars! It's going to happen again, real soon.


Date: Tue Oct 07 1997 22:37

You see, when paper trading volume dries up it's a bearish sign, but when real physical gold volume drops it's bullish! That's because gold is being cornered on a scale never seen in history. LBMA is doing its best to show real volume exists!

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's going nowhere, at least in currency terms. 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!

You see, after 1980, "oil" started trusting paper gold again, just like it did in the 1950's, as long as some of it could be exchanged for physical. But having been burned once, in 1971, they weren't about to be burned again. And what the euro CB's figured out was all that mattered to the producer/savers of the world was the guaranteed FLOW of physical gold, NOT the guaranteed price or weight/mass. (And this is why we pull it out of the ground: so it can FLOW!)

This is what the euro architecture guarantees in the case of a dollar (paper gold market) failure: that physical gold will flow... uninhibited! It does this through its "severed link" association with its own official monetary gold reserves, allowing them to float against the currency and publicly proclaiming this policy every three months in its quarterly "marked to market" consolidated statement. This is something the Fed simply cannot do because the Fed's "gold stocks" are irredeemable paper gold Treasury certificates marked at $42.22 per ounce. The US Treasury owns all the gold. The Fed owns paper (and electronic book entry, post 1935) certificates that are irredeemable to the Fed, so how can it possibly mark them to market?

Notice the Fed still quotes its "(paper) gold stock" (or "gold certificate account" as it is listed on the consolidated statement) on its own balance sheet as 11,041. That is in millions of dollars, so 11,041 is really $11,041,000,000 divided by $42.22 per ounce which comes out to 261,511,132 ounces which, surprise surprise, comes out to 8133.5 tonnes, the same amount voluntarily reported to the WGC and relayed to Wikipedia.

Speaking of Wikipedia, let's see how much gold Saudi Arabia is voluntarily reporting in its "capital account." Wow! Only 322.9 tonnes? That's strange, because when I look back at the A/FOA archives I find that on "Mon Dec 15 1997 11:06" Allen estimated, "Saudi stockpile guesstimate 5,000 metric tonnes," to which ANOTHER proclaimed, "Mr. Allen's perfect article" and, "Mr. Allen, thank you for this thinking. It should be read by everyone."

Oh, and then on "12/1/99; 23:54:38MDT" ORO estimated, "I believe the current gold in hand would be about 6000 tons or so in Saudi hands. The Oil Royals paper gold position outstanding was probably in the 8000 ton range in the end of 98." To this, FOA wrote, "Oro understood this and posted it." (FOA (12/5/99; 17:38:01MDT - Msg ID:20347))

So does it make any sense that the paper-gold printer is practically ignoring his real gold account at $42/oz. while the real-goods producer/savers are intentionally underreporting theirs? I suppose it makes some sense in a really unbalanced "hypothetical" international monetary system that is about to come undone. What do you think?

In my post, The Shoeshine Boy, I wrote that I would revisit the context in which ANOTHER made the statement at the top of this post because it portends vast changes in the international monetary system directly in front of us. So I guess it is time to take a look at that context. Here is ANOTHER's entire first post archived on USAGold:

Date: Sun Oct 05 1997 21:29

Everyone knows where we have been. Let's see where we are going!

It was once said that "gold and oil can never flow in the same direction". If the current price of oil doesn't change soon we will no doubt run out of gold.

This line of thinking is very real in the world today but it is never discussed openly. You see oil flow is the key to gold flow. It is the movement of gold in the hidden background that has kept oil at these low prices. Not military might, not a strong US dollar, not political pressure, no it was real gold. In very large amounts. Oil is the only commodity in the world that was large enough for gold to hide in. No one could make the South African / Asian connection when the question was asked, "how could LBMA do so many gold deals and not impact the price". That's because oil is being partially used to pay for gold! We are going to find out that the price of gold, in terms of real money ( oil ) has gone thru the roof over these last few years. People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? 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.

(Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises.) Westerners should not be too upset with the CBs actions, they are buying you time!

So why has this played out this way? In the real world some people know that gold is real wealth no matter what currency price is put on it. Around the world it is traded in huge volumes that never show up on bank statements, govt. stats., or trading graph paper.

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 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. In the early 1990s oil went to $30++ for reasons we all know. What isn't known is that its price didn't drop that much. You see the trading medium changed. Oil went from $30++ to $19 + X amount of gold! Today it costs $19 + XXX amount of gold! Yes, gold has gone up and oil has stayed the same in most eyes.

Now all govts. don't get gold for oil, just a few. That's all it takes. For now! When everyone that has exchanged gold for paper finds out its real price, in oil terms they will try to get it back. The great scramble that "Big Trader" understood may be very, very close.

Now my friends you know where we are at and with a little thought, where we are going.

What I find most intriguing is this part:

In the early 1990s oil went to $30++ for reasons we all know. What isn't known is that its price didn't drop that much. You see the trading medium changed. Oil went from $30++ to $19 + X amount of gold! Today it costs $19 + XXX amount of gold! Yes, gold has gone up and oil has stayed the same in most eyes.

Like he said, all oil producers don't get gold, just the swing producer, Saudi Arabia. They control the flow of oil from all the other producers. If gold stops flowing and the Saudi's turn down the oil taps the price will rise. As long as gold is flowing, Saudi oil is flowing at $19/bbl and the rest of the producers must sell their oil for just the $19 cash.

So was there really a deal like this made? Of course there was! ANOTHER even gave us the math:

Date: Sat Oct 18 1997 21:04

Let me fill in the Xs.

First a reprint;
"You see the trading medium changed. Oil went from $30++ to $19 + X amount of gold!
Today it costs $19 + XXX amount of gold! "

If you owned a commodity in the ground that had to be sold for paper currency in order to realize value what would do? Yes, the oil in the ground may last another 50+ years but will the bonds and currencies of other governments last that long? One thing you don't do is buy gold outright, it would cause it to stop trading as a commodity and start trading as money! You learned that in the late 70s. Nor do you acquire "real gold money" in any fashion that would allow a comparison of price trends ( graphs ) ! There must be a way to convert the true wealth of oil into the outright wealth of gold. We know that oil is a consumed wealth of a momentary value that is lost in the heat of fire.

The stars blink and it is oil wealth no more!

It has become "the debt of nations " now owed to you. Gold on the other hand is not a commodity as many assume, as it is truly "the wealth of nations " meant to last thru the ages! A wise oil nation can strike a deal with the paper printers and in doing so come out on top. Go back a few years to the early 90s. Oil is very high, you offer to lower the US$ price in return for X amount of gold purchasing power. You don't care what the current commodity price of gold is, your future generations will keep it as real wealth to replace the oil that is lost. Before the future arrives gold will be, once again valued as money and can be truly counted on to appropriately represent all oil wealth!

The Deal:

We ( an oil state ) now value gold in trade far higher than currencies. We are willing to use gold as a partial payment for the future use of "all oil" and value it at $1,000 US. ( only a small amount of oil is in this deal ) And take a very small amount of gold out of circulation each month using its present commodity price.

If the world price can be maintained in the $300s it would be a small price for the west to pay for cheap oil and monetary stability.

The battle is now between CBs trying to keep gold in the $300s and the "others" buying it up. In effect the governments are selling gold in any form to "KEEP IT" being used as 'REAL MONEY" in oil deals! Some people know this, that is why they aren't trading it,, they are buying it.

Not all oil producers can take advantage of this deal as it is done "where noone can see". And, they know not what has happened for gold does not change in price! But I tell you, gold has been moved and it's price has changed in terms of oil! For the monthly amount to be taken off the market has changed from $10 in gold ( valued at $1,000 ) /per barrel to the current $30 in gold /per barrel still valued at $1,000! Much of this gold was in the form of deals in London to launder its movement. Because of some Asians, these deals are no longer being rolled over as paper!

Date: Tue Oct 07 1997 22:37

Ever notice how many important Middle Eastern people keep a residence in London. It's not because of the climate. The most powerful banks in the world today are the ones that trade oil and gold. It is in the "city" that the deals are done by people who understand "value"! Westerners should be happy that they do because the free flow of oil and gold has allowed this economic expansion to continue this past few years.

Understand that oil is still traded for a certain number of US$ but after the deal is done a certain amount of gold is also purchased "with the future flow of oil as collateral".

Date: Sat Mar 07 1998 13:19

A Noble Purpose, This Oil For Gold

When one considers the merits of a specialized world oil currency, the thought usually turns immediately to "send in the military and stop them". I must ask, why? If an oil currency is born before or out of the shambles of an financial meltdown, and it offers great benefit to all, again I ask, why stop it? Look at the merits of such a move:

In a very real "currency sense", oil will be devalued in terms of gold. As one makes a currency weaker by increasing the money units per ounce of gold. Oil will become very cheap in gold, as the amount of gold paid per barrel will fall dramatically as compared to today's ratio. There will be much more than enough gold worldwide to quantify a "world oil currency". To that end, the world paper "reserve currency" at use in that time, will continue to be traded for oil at an extremely low price relative to today. The only change will be the addition of a "unit of real value" added to each trade, a "world oil currency", gold! However, in terms of today's currencies, gold will be "upvalued" to perhaps $10,000 to $30,000 an ounce. So as not to rewrite what is already an excellent piece on this coming readjustment, I will repost part of Mr. Allen ( USA ) 's perfect article on the subject along with his requested changes per his :
Date: Mon Dec 15 1997 11:06
Allen ( USA ) ID#246224:

Last one on this topic until more ANOTHER posts. I'm not sure that it would be necessary to have that large a cabul in on the "offer" of oil for gold. Given the rather small market in gold in comparison to oil/currencies it would only take one or two well endowed oil states to pull this off. Here's why.

Let's say the Saudi's have been accumulating gold through the back door ( approx. 5,000 tonnes ) . They sell say 20 Mln Bbl oil a day. Close enough. At one ounce of gold per thousand Bbl oil that's 10,000 ounces of physical gold per day. That's a lot of physical gold.

The first few moments after the Saudi's proposal to trade oil for gold at a very steep discount of 1000 Bbl/oz ( approx. 1.5% of current US$ price ) there would be roars of laughter. One fast thinker after another would think "Hey. I buy some gold at $300/oz, trade for oil to receive 1 Mln Bbl, then sell the 1 Mln Bbl for US$ 10 Mln. Net profit is

$10,000,000-$300,000=$9,700,000. Easy money.

Everyone at once turns to the gold market to buy, which promptly shuts down. Now no one is laughing. Because everyone realizes that gold is now worth at least $10,000 per ounce and no one is prepared for that revaluation. Whoever has gold now has 66.67 times the purchasing power in that stockpile. What appeared to be a stupid offer has now become a complete revaluation of all gold stockpiles vs all currencies.

Who has the gold?
( per corrections :Date: Mon Dec 15 1997 11:06 Allen ( USA ) ID#246224: )
Saudi stockpile guest-imate 5,000 metric tonnes = 5,000,000,000 GRAMS not ounces. Gold now at US$9.65 per gram revalued by multiple of 66.67 = US$643.37 per gram x 5 Bln grams = US$3.2 Tln.

Germany 2900 metric tonnes = 2.9 Bln grams, revalued to US$1.8 Tln.

USA 8,085 metric tonnes = 8.1 Bln grams, revalued to US$5.2 Tln.

Is this plausible??? How is it possible by making one little change in oil dealings could this ever happen? It is simply the very intelligent use of the scarcity of gold and the necessity of oil. It is the desire of one party, who is big enough to swamp the gold market, to make it the preferred vehicle for buying oil. In fact if not one ounce of gold is ever transacted for oil, but the offer is continued intact, then gold will be revalued simply by the possibility of trading. Those who are in a bad way in their currency situation can always get oil with their gold.

What would the impact of this revaluation of gold and currencies do? It would instantly shift economic and financial power into the hands of those who own large amounts of gold: CB's, Saudi's, Roths et al. It would mean that gold/oil would be THE CENTRAL POINTS OF ECONOMIC REFERENCE. It would mean that currencies would be devalued by a factor of 1000 in relationship to the new standard of gold ( as a proxy for oil wealth ) It would upset an awful lot of people. There would be no TARGET to shoot at or take over, however, because all other oil producers would immediately jump on this band wagon. Its a simple matter of what an interested party is willing to receive for their goods. Venezuela, with gold and oil reserves and production capacity, would be one of the wealthiest nations on earth. The world would be turned upside down geopolitically, wouldn't it. Literally "..the 'have-not's of the world will become the 'have's.."
Mr. Allen ( USA ) ,
Another thanks you for this thinking. It should be read by everyone with an interest in this area. It should also be studied by students wishing to learn of market dynamics. We also offer this piece as an addumnum to the above, also by the same author.
Date: Mon Dec 15 1997 10:49
Allen ( USA ) ( Quick Note to JTF re: 23:05 post - US$ oil float ) ID#246224:
US$ price of oil is floating. The "proposal" to offer oil for gold at say 1000 Bbl/oz is far below the present float price in US$. The gold market is SO SMALL that if the oil nation that made this proposal was pumping enough oil the gold market would be swamped by oil buyers who were looking to make a few ( !! ) US$ on the discrepancy in price. In effect this would revalue gold by inserting an entire different group of buyers into the gold market who have ALOT of money.

Why is it the oil nation would not just buy at market? Same as above. Their effect in the open market would basically shut down the market thereby frustrating their efforts to buy gold. Conversely, why would they then make the "proposal"? Because either they have enough gold to buy the world at the new price, there is a crisis in which they feel it is to their advantage to do this ( such as a US$ crisis ) or they might have a geopolitical rational. In the new valuation the US$ would still be intact. But its monopoly role would be altered. Its not that currencies would become worthless but that gold would become worth much more in relationship to paper currencies.

To answer the "military" question, asked at the begining of this article, I say:

The massive increase in the "reserve currency" price of gold would, no doubt be ushered into the USA house of congress as a godsend answer to Americas debt problems. With the "full production" of oil, now viewed as a sure thing, The world may well see the USA send the military into the Middle East just to ensure that this "deal" [Freegold] is not disturbed. After all, it is oil that will be massively devalued by gold.

Thank you

Did you catch what he said there? He said the US would not use its military to stop Freegold. Instead, it would use it to ENSURE Freegold once its benefits to even the US are recognized! This is such a simple concept yet so few of you seem able to grasp it.

And for those of you that keep asking me if I think the US gold is still there... yes, I do.

Here is something you need to understand about the US gold. The Fed does not own it. The US Treasury does. Following the Gold Reserve Act of 1934, the Treasury gained title to the entirety of the U.S. monetary gold (including $3.5 billion of which was currently being held by the Federal Reserve banks). From that point on, the Fed has received private issues of new-fangled gold certificates in $100, $1,000, $10,000 & $100,000 denominations -- not to be paid out and not for circulation.

So the Treasury took 175 million ounces of gold from the Fed, paid it in DOLLAR-DENOMINATED certificates for this gold at $20 per ounce, then revalued it to $35 per ounce. So if the Fed had even been able to redeem those certificates for gold in 1935, it would have only gotten back 100 million ounces. The windfall of 75 million ounces of gold ($2.6 billion), in this case, went entirely to the US Treasury and not the Fed.

The entire Treasury windfall was $2.8 billion and was the reason and the funding for the establishment of the ESF, the Exchange Stabilization Fund in 1934. So following the Gold Reserve Act of 1934 100 million ounces of gold were already automatically monetized. The rest of the US gold was eventually monetized through the Fed. The way this happens is the US Treasury issues fancy new non-negotiable, dollar-denominated gold certificates to the Fed and the Fed credits the Treasury account with dollars.

Today, all of the US gold has been "spent" in this way, but only at the price of $42.22 per ounce. That's 261,511,132 ounces of gold monetized at roughly $11 billion, money that was spent long ago.

So you see, the Fed cannot mark the US gold to market. It cannot even revalue the US gold. Only Congress can. And even if Congress DID revalue the gold, it would not change the Fed balance sheet by one penny. The Fed only holds dollar-denominated certificates worth $11 billion, payable in gold, but not really. It's kind of like Aramco in 1945 who owed the Saudis $3 million, payable in gold.

If Congress DID decide to mark the US stockpile of gold to market today it would find it had a new stream of revenue. At today's price of $1,328 per ounce, the US gold would be worth $347 billion. Subtract the $11 billion already on the Fed balance sheet and Congress could immediately ask the Fed to credit the US Treasury with $336 billion new dollars to be spent.

And then, if they let the value of the gold float, anytime the price rises, they could issue more fancy dollar-denominated gold certificates to the Fed and be credited with new dollars to spend. In fact, at a Freegold price of $55,000 per ounce, Congress could retire the entire US national debt without giving up a single ounce of gold, merely monetizing what it already has through the Federal Reserve. But what will really happen someday soon is the additional step of opening the vault and allowing that gold to FLOW again, but at a floating price. With this one move Congress wouldn't have to retire the entire national debt because credibility would be reestablished.

You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades. The US gold has been hoarded and locked away for more than 30 years, never deployed in case of emergency. The European CB's took a lot of flak for selling gold over the past two decades, but that action is precisely what makes them so much more credible (and valuable!) than the US gold hoard. Any trading partner knows full well that if all else fails, gold will be paid.

The price of gold today is unstable. Anyone with eyes can see that. Worse, it's rising. Which means the flow of physical gold in the quantities needed (at today's gold price) to lubricate global trade is drying up.

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

But the flow of physical gold WILL be reestablished. The world demands it. It doesn't care how high the price goes, only that the flow is guaranteed. Only the $IMFS seems to care about how high the price goes. And, apparently, that is because the $IMFS is the main printer of paper gold. Flow WILL be credibly and sustainably reestablished, which means paper gold WILL be discredited. Flow is sustainably and infinitely guaranteed at a floating, physical-only price. What that price is in today's world is anyone's guess because we haven't had such a market in centuries.

Oil will probably keep rising in price until something breaks. Then it is going to around 1,000 bbl per ounce of gold when the paper gold market fails to deliver the increased flow demand of physical gold at the paper market's low four-digit dollar price. And the oil producers will be VERY happy with this new, guaranteed flow. Hard to believe? Believe it! And if that doesn't scare the pants off somebody who has their whole life's savings fully invested in paper promises at today's valuations, nothing will.


"Sir, I feel the prudent allocation of wealth assets will see us thru most of this." - FOA

"I think that surviving the transition has to be the No. 1 priority and I also think owning some physical gold is a key part of a survival strategy." - Costata

"We have met the enemy and it is us. The best we can do now is just prepare ourselves, our family, and friends, at least that very small percentage that will listen." - Greyfox "It's the Debt, Stupid"

"Charles T. Munger
says you’re a jerk if you buy gold, even if it works. He wants you in equities so he can pluck you like an animal." - A Friend

ORO (12/1/99; 23:54:38MDT - Msg ID:20038)


As I have worked it out, the purchase is done on paper. The accumulation is slow but steady. They obtain the gold for gold loans from themselves and buy it back. The rates of accumulation are not the same today as they were in the past. The 1995-1997 period was the main thrust where 8000 tons were committed and 4000 tons of their own gold were used to back that up (sums in total for the period). Trades were executed in the second and third quarter of every year. Prior to that, the accumulation was significantly slower, probably on the order of 12000 tons gross since 1987, going into 1994, a large minority of that in paper form. I believe the current gold in hand would be about 10000 tons 6000 or so in Saudi hands. The Oil Royals paper gold position outstanding was probably in the 8000 ton range in the end of 98.

I would need to expend a significantly larger effort to put all that together into better estimates with something beyond back of the envelope calculations. Right now, obtaining information before 1995 is quite difficult.

The main point is that in 98, as Asians dumped their gold, the Arab Oil countries were getting delivery.

Because of many Westerners dumping their gold holdings after a disappointing 20 years, right at the beginning of a new gold bull - right after the first spike, it is in the interest of all gold accumulators to use the opportunity of collecting more gold at a discount to do so, even if one needs to delay a long plan from executing.

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