If gold is used in any way, won’t that require a revaluation of gold higher
in order to not simply exchange USD’s for USD-denominated gold?
REPLYin order to not simply exchange USD’s for USD-denominated gold?
Jcollins
AUGUST 5, 2015 AT 8:24 PM
The gold could be denominated in RMB, or even SDR (SPECIAL DRAWING RIGHTS). You are thinking the right way, but timing will be the issue. The cheaper gold is when the deposits are made the more the losses on USD can be subsidized when gold increases again in value. I’ve always stated my opinion that gold would go a lot lower during the transition, before increasing again after. This could be what we are looking at. It’s been a long drawn out analysis and process, but the end methodology is beginning to take shape. Don’t expect gold to go to $5000.00/oz, or $10,000.00/oz, as many proclaim. It will settle within a reasonable band to support the SDR and substitution account framework. At least until the demand to remove the self-limiting valuations are acted on and mass over creation of SDR pushes the monetary system once again into new forms of imbalance, such as countries not being able to maintain their weight within the SDR because of poor domestic fiscal policies and production inefficiencies. The solution offered at that time will be the evolution of the SDR basket into the actual bancor currency, just like the ECU evolved into the euro, and the ACU will evolve into an actual Asian currency. That’s a big answer to your question. Thanks for giving me the opportunity to get some other ideas out. Haha
AUGUST 5, 2015 AT 9:23 PM
Thanks for the thoughtful answer. It leads me to a follow on question, which is if gold is really the only mechanism to depreciate the dollar that does not result in making other nations’ economies wildly uncompetitive, given the debt amounts involved, doesn’t that necessitate a fairly high valuation for gold in the end game?
REPLY
Jcollins
Gold revaluation is not a mechanism to depreciate the dollar. That is not what I communicated. It has nothing to do with depreciating the dollar. The dollar will depreciate against other currencies when the reserve demand for dollars decreases. Gold will not be at the center of this monetary framework, just like it wasn’t the center of Bretton Woods. The gold will be placed on deposit at lower prices so that when it appreciates marginally down the road, the losses accumulated on dollar depreciation can be gained back by the appreciation of gold. This will help balance the portfolio of the IMF. Does this help explain it better?
http://www.jsmineset.com/2011/05/26/the-mathematics-of-gold/
ThE ultimate arbiter of gold’s new equilibrium price band will be total sovereign debt. This alone produces a crazy number. Then throw in unfunded liabilities, OTC derivatives, ETC.
The key is at what price will gold delever the globe. At what gold price will there be enough debt extinguishment. For that is the problem. Debt service is presently incompatible with what many consider normalized interest rates.
Jcollins
AUGUST 5, 2015 AT 9:38 PM
There is a measure of accepted failure built into the transition. Some derivatives will collapse, and some will not. Some sustainable segments of derivatives will be repackaged and the unsustainable segments will be allowed to fail, or be written off. Gold will not be leveraged to save the world. That is gold bug propaganda pure and simple. Large swaths of private debt will be allowed to fail while large swaths of public debt will go through a form of debt restructuring, likely the SDRM process of the IMF. When the balance of payments challenges begin to be corrected, the debt of each sovereign will begin to be more serviceable based on adjustments to the debt-to-GDP ratios. I have been correct so far when it comes to gold. There will never be $10,000 gold, or even $5000.00. We’d be lucky to see $2000.00 gold within the next 20 years. Period. Anything else is just inflammatory nonsense. Sorry Cramley, I have to call this one as I see it. I can take the attacks from the gold bugs, because in the end they are their own worse enemies. But I’ll tell you what, the lower gold goes in the coming months, the more I’m likely to accumulate myself.
AUGUST 6, 2015 AT 12:26 AM
Do you know how leverage works? How it works in reverse when collateral falls in value? Are familiar with rehypothecation? Do you realize how markets will react to just a hint of sovereign restructuring?
AUGUST 6, 2015 AT 12:42 AM
Haha, do you understand the difference between fantasy and reality? You’re approach will get you know where here Cramley. As per past exchanges between us. You just put strings of thoughts and concepts together to sound like you know what you’re talking about. The reality is that I have been correct at every step of my thesis, while you have been continuously wrong. Period. No Argument. Be very careful what you promote. People have lost life savings because they listened to fantasy talk about gold going to $10,000/oz. Do you honestly want people to loss their life savings because they listened to you? If it sounds to good to be true, it is. Stop wasting my time with this drivel of outrageous valuations for gold. It has been proven ridiculous time and time again, and will continue to be proven as such. Gold will not be the savior of the international monetary system and make everybody which has some rich. It will continue to go down. And when it does go up, it will take years and most people that got in at anything over $1200.00/oz will not see positive returns for years. As I said, I disagree with you, but appreciate the input. Now stop coming into my house and trying to overturn the apple cart. The wave of facts, events, and evidence is building against your script. You will not sway truth.
PS. Your questions, when considered alongside the content of information which I present here, is frankly absurd.
AUGUST 6, 2015 AT 2:38 AM
Hi Jcollins
First time posting on POM but I’ve followed your work from almost the beginning. I really view it as one of the most straight forward and level-headed blogs on the web, the accuracy of information has been spot on as well. I can’t thank you enough for making this transition easier to understand.
As a Vancouverite I can’t help but feel everything over priced, I thought buying gold was betting against the system but I guess not.
Would going with the system and buying RMB be the better bet? I feel like stock, bonds, real-estate will all go lower and if metals stay flat or drift lower is CAD terms. Will there be any winner’s during or after the collapse?
REPLY
Jcollins
AUGUST 6, 2015 AT 3:02 AM
Thanks Shawn. I’m uncomfortable giving financial advice outside of explaining the fundamentals of the transition. But diversification is always the best path. The more diversification the better. Consider what is low and what is high. We need to buy low. Never buy high. Only sell high. Commodities are low. Real estate is high. Tech stocks are high. And we have a good idea, based on trade surpluses, which countries will need to appreciate their currencies. And always hold a little Vietnamese dong for shits and giggles. There are always winners. Be patient and smart brother. Think long term.
AUGUST 6, 2015 AT 6:27 AM
Hello,
With this delay is expected that more QE is coming in USA and Europe till Septbre 2016? If not, how liquidity crisis situation will be solved? I do not believe Europe follow its own way?
REPLY
Jcollins
AUGUST 6, 2015 AT 7:13 PM
R, it is my conclusion that there will be no more QE. It is time for the system to drain liquidity in preparation for new liquidity. It’s callous to state it so bluntly when many will loss, but that is the reality which I see coming.
Transcript of a Conference Call by Senior IMF Officials on the IMF Staff Report: “Review of the Method of the Valuation of the SDR — Initial Considerations”
Washington, D.C.
Tuesday, August 4, 2015
http://www.imf.org/external/np/tr/2015/tr080415a.htm
AUGUST 6, 2015 AT 6:24 PM
JC,
I am wondering how the time line you describe will affect the ultimate monetization/assignment of Chinese Historical Bonds, which are denominated in both gold and silver. Here, I would like to know your thoughts on how the assignment of these bonds, an informal form of private redemption, would allow the Chinese to use their USD reserves to retire or as a minimum shelter these Historical Bonds. Further, could we end up seeing the Historical Bonds, with BIS approval, end up as capital on Chinese Bank Balance Sheets?
Best Regards
AUGUST 6, 2015 AT 6:58 PM
P, after much research and attempts at confirmation, I’ve been unable to find any supportive evidence in regards to the redemption of Chinese historical bonds. Or any historical bonds for that matter. It is my final analysis on this matter that any historical bonds will not be honored and will have nothing to do with the multilateral transition. The historical bond market has zero liquidity and so many have taken advantage of this little understood area to scam thousands out of their savings.
Phrases such as “private redemption” have become the working tools of this scam. The promises of instant riches keep believers purchasing more and more bonds which are worthless. People are paying anywhere from $500.00 per bond to $2000.00 per bond, depending on the scam script. After years of waiting and waiting people will get disenfranchised and unload the bonds for whatever they can get, sometimes less than $100.00 per bond. Check ebay for proof of this. (but they’ll tell you the ebay bonds aren’t the right ones) The scammers purchase these bonds cheap (probably from ebay) and continue to sell them to others at the inflated prices. The story-line is so intriguing and believable initially that thousands of new “investors” fall into the trap and wait for their turn at private redemption.
A
AUGUST 6, 2015 AT 12:28 AM
I have another follow up question too, related to your comment about gold not revaluing much higher after the SDR reset. Let’s say your forecast is correct, and the primary adjustment that takes place is the USD in comparison to the yen, GBP, Euro, and RMB. And let’s take an extreme example and assume the USD$ depreciates by 50% vs. these other currencies. Doesn’t that still leave these countries and the world with still way too much debt? How does that debt get extinguished? Through sovereign and corporate defaults? Doesn’t that mean you are calling for a massive debt deflation after the SDR reset takes place? (I think you are not calling for that, which probably means I’m missing something). Thanks JC.
REPLY
Jcollins
AUGUST 6, 2015 AT 12:56 AM
There will be a level of debt deflation, which I covered in the post A Solution to the European Crisis – Debt Deflation, Domestic Assets, and the European Stability Mechanism. There will also be a process of sovereign debt restructuring through the IMF, called SDRM. An increase in global growth, based on massive infrastructure development in the emerging countries, will also reduce the stress on debt management by increasing GDP and lowering the debt-to-GDP ratio in most countries.
AUGUST 6, 2015 AT 12:23 AM
I read your long post and it was indeed very detailed and full of insights. Thank you.
But I think my question remains. Even if the IMF decides today to incorporate the RMB into the SDR basket, if implementation is delayed until September 2016, doesn’t that create a risk for China that they might have to devalue given the capital outflows China is experiencing? And might that (delay) not be part of a purposeful strategy by the U.S. in order to reduce the influence of the RMB in the SDR basket?
REPLY
Jcollins
AUGUST 6, 2015 AT 12:48 AM
Thanks Adam, I understand your question better now that you’ve re-phrased it. I’m a little dunce sometimes.
I would suspect that the Chinese would end the peg to the USD before allowing their currency to depreciate more. The amount of bi-lateral swap agreements they have developed with central banks around the world, and other methods of creating RMB liquidity, such as through the AIIB and Development Bank, will help the currency maintain it value, or perhaps even appreciate against the USD. I don’t think that play would work well for the US, as there are alternative measures which are now available.
Delays? http://www.zerohedge.com/news/2015-08-04/chinese-stock-short-squeeze-stalls-after-imf-delays-decision-yuan-sdr-inclusion
REPLY
Jcollins
AUGUST 5, 2015 AT 12:53 PM
It’s important to recognize that the IMF has not yet delayed this decision. A recommendation has been made to delay it for 9 months only. The Executive Board will still have to decide if they take those recommendations. There is likely a lot of political and economic pressure being applied from the American side and the Chinese side. We shouldn’t let misleading headlines and dramatic conclusions distract us. There is much yet to be decided.
AUGUST 4, 2015 AT 11:58 PM
Some talk about bancor on max keiser
Episode 792
http://www.rt.com/shows/keiser-report/311512-episode-max-keiser-792/
AUGUST 5, 2015 AT 8:56 PM
Thanks for the link.
JC, do you know whether a dilution in quotae, would affect the voting shares?
REPLY
Jcollins
AUGUST 1, 2015 AT 1:16 PM
R. Yes, it is the way around the 85%.
JULY 31, 2015 AT 6:13 PM
Yes, yes, of course, but what I mean is that China will pay its duties with the dollars from its reserves and therefore, maybe later than sooner in the IMF Balance sheet will appear US dollar as assets at higher price than the price of dollar after beeing devaluated, at least its my understanding and it means losses, I would say significant losses.
REPLY
Jcollins
JULY 31, 2015 AT 7:13 PM
Not if those assets now make up a part of America’s quota amount and SDR allocation. Remember, the purpose of the substitution accounts are too prevent a depreciation of assets through the transition, or exchange.
R
JULY 31, 2015 AT 4:33 PM
Sorry. If I undestood well, then US is paying the increase in quota and SDR allocation of China and any country with dollar in reserves. Is it that way?
REPLY
Jcollins
JULY 31, 2015 AT 4:57 PM
Not really. China purchased US debt (bonds), which have a term which the US has to honor or go into default. The ownership of the bonds will transfer to the IMF. There are many scenarios which could play out depending on how the transfer is negotiated.
JULY 31, 2015 AT 4:08 PM
Then, How IMF will cover its losses after US.Dollar depreciaton? I am lost
REPLY
Jcollins
JULY 31, 2015 AT 4:16 PM
It wouldn’t need to. China owns USD denominated assets. They exchange those assets, at current market value, with the IMF for an increase in quota amounts and SDR allocation. Both of which would be denominated in SDR. A future depreciation of the dollar would not matter, unless they wanted to exchange back to USD.
R
JULY 31, 2015 AT 2:57 PM
Are we at the begining of a mutualising the U.S. debt through IMF, JC?
REPLY
Jcollins
JULY 31, 2015 AT 3:22 PM
Possibly. Sovereign debt is going to become a very big issue in the coming months and into next year. The rest of the world, frustrated with the US, is unlikely to want to continue financing US debt and deficit spending. The inevitable multilateralization which is taking place will ensure that outcome.
