Saturday, June 6, 2015

Freegold: How will we get there

In this article I am trying to see how the present will move towards Freegold. This will be modified as I get comments from other more knowledgeable people.

Currently we see that the Bond bubble is breaking down. But the problem at present is that there is a liquidity crunch as US is not printing. Also the panic is not widespread so there is no urgent need to get out of Bonds. It is very slowly deleveraging. The slow deleveraging is causing the Dollar to rise.

I think that the following steps would happen before and during the coming crisis. Note these will not be clean phases. A lot of overlap will be happening. As different people will be doing different things.

1) Eventually the panic should spread causing the bond market to implode. At that point a lot of money from Bonds will move into Dollars. Due to this movement dollar will rise very fast. People will probably sell other currencies to make money by moving into Dollar. The reduction of other currencies will only be with respect to the Dollar. It could happen that paper gold crashes during this phase, but I am not so sure.

2) Eventually people will start moving out of the Dollar. This will happen differently in the US and other currency zones. In US people will be buying stuff, causing inflation to rise in the US. While non-americans will be selling Dollars to buy other currencies. Non currencies like XAU, Bitcoins will also be bought, causing these to rise pretty fast. This will be the phase that will trigger hyperinflation in USD. I am not sure how it will play out with Pound and Yen. I don't think they will crash during this phase. Gold will definitely go into hiding in this phase.

3) Once USD is crashing towards hyperinflation, people will get worried about their currencies and they will want to get into something real at this point most currencies will start to fall and prices will rise. This is the phase when XAU will crash, as gold will not be available and the two will get out of sync.

4) Gold revaluation happens on the Shanghai Gold Exchange. Several Central Banks will sell gold to reduce the liquidity in the market caused due to people getting out of their own currencies. Britain and Japan will not have enough gold to reduce enough liquidity, and also they have already printed a lot of their currencies which will cause a massive devaluation. This is the phase that is firmly in the Freegold Economic Order.


  1. You say:

    Currently we see that the Bond bubble is breaking down. But the problem at present is that there is a liquidity crunch as US is not printing

    Which implies that the latter is perhaps caused by the former, or perhaps is unrelated(?). However, we might consider these two factors from the opposite perspective:

    The problem at present is a liquidity crunch while the Fed has suspended printing. The world does not have sufficient dollars circulating to keep on bidding up US asset markets, such as bonds. Not the least reason being so many dollars are continuing to be taken out of circulation through Treasury bond issuance, to finance the ongoing budget deficit, but not adequately replaced through QE (or through private sector borrowing).

    Consequently, we see that the bond bubble appears to be in the process of rolling over, since profit-driven private investors do not seem overly interested in using the tightening float of dollars to pay nose-bleed prices for bonds that no longer appear to offer the potential of a capital gain when trading on to a bigger fool a little later (partly because the biggest fool of them all, the Fed, is no longer buying), and offering razor-thin income that does not seem to adequately reflect the risks involved in holding to maturity (risk-free US Treasury bills excepted from default risk, of course! But don't forget that the Treasury will still need to repay these lent dollars with more new dollars later, so that may prove to be of interest as they all come around to maturity unless the market's appetite for Tbills/Tbonds can be sustained and/or QE is resumed by then... and, of course, there are also the ever-changing assessments of inflation, and exchange rate, risks to contend with too).

    In a self-perpetuating feedback loop, this topping in the bond market causes increasing numbers of market participants to pause and consider directing more of the tightening supply of dollars towards "the obvious alternative": US equities. For now?

    At some point I would not be at all surprised to see the shrinking-liquidity-induced slack appear in the equity markets too; will this be enough to re-inflate the bond bubble?

    Perhaps even before the equities market tops out, it seems eminently possible that the dollar might top out against other currencies; meaning non-US assets may then take over the role of "flavour of the month".

  2. If non-US assets take over the role of "flavour of the month" (among the private market participants of the world), will the non-US Central Banks of the world step once more into the breach, to support ye olde US dollar's exchange value? (AKA "structural support".)

    The consensus opinion among freegolders is: no.


  3. Thanks DP.

    Are you saying that bond money is moving into equities and some time later it could move back into bonds?

    I guess till the panic happens things can continue like they are money moving from one place to the other. But I guess more money needs to come in for stuff to have a higher price.

  4. What I'm saying is I don't know anything. :-)

    But "more money needs to come in for stuff to have a higher price" does seem like a reasonable guess, to me.

  5. Without more money, we have less money — which doesn't seem like it would be helpful.

  6. Agreed DP.

    I am just trying to make wild guesses here. I think that the first guess is the wildest :-).