Wednesday, 18 January 2012

On reaching an eventual plateau

FOFOA's inverted waterfall graph gives a good overview of the way the price of gold will play out in our paradigm shift to FreeGold.

There remains however something consider(for us shrimps at least), being how much of an overshoot will occur, what the causes of such an overshoot will be, and if we can capitalize on it.

It is well known that all markets tend to overshoot during a strong upwards or downwards move due to sentiment. I think that is reflected in the above graph.

It is agreed that trying to time sentiment in that regard, in changing to other possible productive assets, is ill advised.

There is however another factor that could seriously impact the level of overshoot. I also think that this factor could have more serious staying power and that small holders would be able to benefit from it. I do not think this has been reflected in the above graph.

This play is not for the weak minded or spineless. There is however a way we will be able to gauge the impact of this factor, which would make it easier to consider.

The fact of the matter is that those who we refer to as giants tend to lurk in the shadows, and like keeping their cards close to their chests.

Now. The estimated amount of aboveground gold is around 170,000 metric tonnes. Of that approximately 30,000 tonnes is held by central banks officially, with perhaps as much as 50,000 unofficially. I would like to exclude, for now, the gold in ground estimates of about 50,000 metric tonnes, as this gold will be dealt with differently after Freegold, and will take a long while to extract either way. The rest can be said to be private holdings. Of this, around 30,000 tonnes is 'accounted' for. The remaining 60,000 tonnes whereabouts can only be speculated upon.

I think a conservative estimate would be that perhaps an additional 20,000 tonnes is in private holding of small holders, and that dark giants account for the remaining 40,000 tonnes.

This amounts to about a quarter of all known gold in existence.

So here comes the interesting part. I would propose that in the immediate months (and perhaps years) following FreeGold none of the giants would acknowledge their holding of gold (or perhaps only very small parts of their holdings).

This means the effective stock as publicly perceived would be reduced by about 40,000 metric tonnes.

Small holders would make some of their holdings known by contributing some to flow, and I would imagine that official holdings would be publicly acknowledged. Other currently publicly held gold would also remain publicly known.

I think that my estimate of 40,000 tonnes is likely very conservative; we may see as little as only 100,000 tonnes in the public realm initially.

This will of course impact the price of gold in order to establish sufficient flow to clear world trade (to the upside).

What this means is there should be a brief period during which gold is overvalued, relative to the final stable price under a FreeGold paradigm (not due to sentiment).

Our method for ascertaining the amount of hidden gold would be simply to check the amount of gold acknowledged publicly from either public or private holdings and comparing that to the estimate of total gold in existence.

What this means for shrimps, is that there would be a opportunity to exchange gold for other productive assets at a value higher than the final stable price.

Hope you enjoyed the latest Foolish Perspective.


The Fool


  1. Seems like your conv with AD got you to thinking downstream a bit.

    Honestly, when the wheels come off the current bus, I'll be holding onto my gold with a death grip, especially when it is worth 30 times what it is now.

    But just for arguments sake, I see your point.

    The thing I ask myself is, what part of that curve can I take advantage of most?

    Obviously it is on the uptake before the ripple.

    I stand to make more by acquiring a few grams at a time right now and riding the rocket, than I would putting ounces at risk on the window you describe.


  2. Hey NS

    The interesting thing about this window is that it would remain in place months(and likely years) after FreeGold has arrived. It will also be relatively easy to gauge the undeclared volume of stock.

    Once all stock has been declared the price should plateau. :)


  3. "Hear me now, what the wealthy and powerful know: "real value does not have to always be stated or converted thruout time. It need only be priced once during the experience of life, that will be much more than enough!"

  4. Fair enough. You will not find me disputing the value of those holdings in the FreeGold paradigm.

    This post is meant as speculation on the possibility that 'the market' may not accept as the stock of gold the officially agreed upon figure of 170,000 metric tonnes until all that gold is publicly accounted for.

    If that hypothesis is correct it would give even more incentive to dark giants not to immediately declare their holdings, as the marginal flow price may be higher if they do not.

    There are of course other factors that will tend to counteract this, including marginal sales, and more prominently the unleashing of human capabilities due to the new less restrictive paradigm.


  5. FWIW, "when it is worth 30 times what it is now" is around about exactly the time I'll be starting to liquidate my meagre stash to (1) pay off my mortgage with those lovely "cheap pounds" so me and mine can finally be free of The Man, and (2) invest in income-producing "cheap rental properties". Shrimps gotta eat. The Giants are welcome to my gold, as soon as it has been repriced "once during my experience of life". :)

  6. BTW, your colour scheme sucks ass. Nice graphic and I get the message - but really quite hard to read the text. Fortunately(?) for you, I am keen to read what you wrote. But new visitors might well decide your content isn't worth the eyestrain(?), which would be a pity. ;->

  7. Replies
    1. Much more readable. A shame to lose the message of your image of course.

  8. Interesting theory! And apologies for being late to the party, Ive just started to back-read your blog a bit...

    What I don´t see with your reasoning in this post is why the "dark giants" should ever acknowledge their gold holdings (except when they want to sell them, which will not be often or in large amounts I think). They don´t now, and I don´t see why they would after the transition either. Also, I don´t understand why "official" (as opposed to hidden) total gold stock should have much of an impact on the price, if the flow (by weight) is small. And the 170kmton figure will still be out there regardless of how much is acknowledged?

    Please expand on your theory if you are able, one of us is missing something (probably me);-).

    This is all just an academic excersise of course. At about 30X todays value I will most certainly make like DP with at least half of my stash. Assuming of course that I don´t have to spend it on food before that.

    1. Hey Bjorn

      It was a thought on market over-reaction when the grand scramble for physical gold occurs, initially. You are quite correct that flow is what matters, but I'm not sure the market psyche will agree Initially when it cannot account for a large fraction of supposedly existent gold.

      My disregard of the flow (that which is important) does of course significantly reduce the period during which this overvaluation will manifest, to the point of being practically worthless. :D

      I'm sure others were simply too polite to point out this colossal oversight. ;)