It’s interesting to see PGA’s (physical gold advocates) trying to defend recent gold “price declines” in dollar terms using the same technicals of the same past wherein the so called “price” of gold in dollar terms was always under constant manipulation, just as it is today. This is understandable if you think in terms of the past, going forward.

But not all PGAs think alike. Some, especially those with a historical perspective, look at the entire point of their advocacy as being prepared for the ultimate economic paradigm shift, when the concept of “debt as wealth” loses all credibility. Logic demands that this will happen. And when it does, debt will no longer function as a medium of exchange between things of value, as it does today.

Currencies will then exist under a new relationship to the issuer’s reserve asset base, rather than existing purely as debt expansion.

That change will present a phenomenal paradigm shift in the minds of most people, including economists and financial analysts, many of whom simply never realized all the implications of the current debt-based money system.

One may say: “This current route in Gold is the public paper price discovery mechanism breaking down.” And another may write:

“The paper metals market is diverging from the physical bullion market.”

And in those thoughts lie the beginning of change.

One cannot rationally use the empirical mindset of the Ptolemaic model of the Universe to prove the Copernican. Yet, we look at the charts and technicals of the former economic paradigm to explain the shift to the new. At the center of the old Universe lies the expanding debt, like a model of our Galaxy revolving around the Earth. At the center of the new Universe lies gold, like a model of our Galaxy revolving around the Sun.

Both models appeal to our most basic perceptions. But as our perceptions evolve we interpret them differently.

Would you try to understand the fluctuating “price” of the promises of politicians, the swindles of money changers and the obligations of the immoral? That price is measured in confidence alone. Yet we “price” gold in these very same promises, swindles and obligations. For these are all that debt is, and all currencies exist as debt, just as paper gold exists in promise only, an obligation to be dishonored, a CONfidence betrayed.

As paradigms shift, old models do fail.

As long as people, or banks, or countries accept “paper gold” as a means to some end, it is not so much “confidence” in the system that glues it together as it is “utility”. There are winners and losers when debt defaults. Senior debt-holders are made whole, while the lesser lose all. MF Global was one such lesson in subordination.

As the dominoes of global debt subordination topple, they do so from the bottom up, reaching ever more senior debt holders, subordinated by more dominant claims. There comes a time when all claims are contested, and utility fails. That is when confidence in the “$afest” of debt fails.

We’re not there yet, but we have certainly begun the ascent.

This current route in Gold is the public paper price discovery mechanism breaking down. We could see dips of $300 intraday in a long term downward trend toward $300/oz. … publicly … but the interbank flow of real gold will be quite a different story during this time.

The current paper price discovery mechanism for gold, on your broker’s screen, or at the Kitco website, is dependent upon a single factor which ALL paper is dependent upon: CONfidence.

This current pricing mechanism is approximately 200 parts paper to 1 part gold. Therefore the physical metal itself affects the pricing mechanism only by 1/200th of it’s derivative paper component.

It is the loss of confidence in this paper component, courtesy of the downfall of Lind-Waldock (a casualty of MF Global) which is crashing the (paper) price. So you could see $1500/oz (or below) gold later this week, but you’ll need to be diligent to acquire it. If I’m wrong, and negative lease rates are completely to blame, we’ll see a snap back, but don’t hold your breath for it.

Behind the scenes, the landscape for big money traders attempting to move physical is quite different. But we are not as concerned with their dealings, as they can surely fend for themselves. Middle money is now in the great squeeze. It’s the Bob Cratchits who stand at the crossroads today.

As the paper price continues to plummet, there will be holders of coin who rush to sell in a panic that their physical was indeed in a bubble, and they need to “cash out” before it falls further. And someone like me (and maybe you) will be there with cash in hand to assuage their fears.

But I am here to tell you, that it is the vastly fractionalized PAPER gold that was in the mother of all bubbles, not the metal itself. It is the PAPER claims upon gold that are now collapsing, as the first great ripple-shock of paper gold default makes its way across the shores and back.

For as any simple man can see, the true value of gold has never changed in over 5000 years. When the paper goes up in smoke, a sudden realization of total global supply will be the subject of shock and awe. Yes there is a massive amount above ground, but only .01% is real … and … 100% of its value lies in POSSESSION.

We are witnessing the collapse of the paper gold market, just as predicted by those who agreed to (and funded) its founding.

And just in time to make for a very Merry Christmas, God bless us each and every one!

From Jim Sinclair:

 … by putting the OTC derivative positions of a bankrupt clearing house ahead of its client’s deposits, this case will ultimately break the very market mechanism for price discovery. The system is already broken, but whereas Lehman Bros. was the “Lehman event” for Main Street, MF Global is the “Lehman event” for the insiders. When your clearing house becomes a questionable counterparty, it’s over.

But in essence, no one explains the implications better than FOFOA:

The Achilles’ heel of the $IMFS (international monetary and financial system) is that debt is the system’s official store of value and foreign exchange reserve. And bearing this flaw, savers, currencies, banks, governments and even entire countries are all vulnerable to the
inevitable failure of the debt.

The problem with debt performing these functions is that debt is a derivative of the currency itself. Currency moves opposite the flow of real goods and services. And with a derivative of the currency acting as the only counterbalance to uneven trade, there emerges the exact opposite of a natural adjustment mechanism for correcting trade imbalances.

With debt as the store of value and official reserve asset, the party producing more real goods has no way to record his net production (savings) other than lending that excess currency back to the consuming party, encouraging him to consume more, and recording the new debt. A true adjustment mechanism makes the balance swing back and forth. But the debt system requires an infinite debtor. So the system is designed to fail. The debt backing the system is designed to fail. And as the official store of value and reserve asset, the savers, currencies, banks, governments and even entire countries are destined to fail in the end… under the $IMFS.

While I haven’t read every single post of FOA, or FOFOA, I do believe this is the first time, other than in my prior posts, that the concept of debt being a derivative of the currency itself has been recognized. And of course from this follows that the debt based global reserve currency, the U.S. dollar, is in fact the original financial derivative, from which all other debt protection rackets, a.k.a. “financial derivatives” spring. As I have said, the present U.S. dollar has gradually become a derivative of its former self, as its backing went from gold to debt.

But FOFOA is correct in observing that “backing” or “price-fixing” a currency to anything of hard value (gold, oil, wheat) is flawed. That flaw was realized and the solution crafted decades ago. It does take time to move mountains.

But understanding these things at this point in time will be little comfort for those in the back of the redemption line. You see, bullion dealers are now faced with position risk, thanks to the slowly unfolding reality of MF Global. It hasn’t sunk in yet with middle money, but big money is already spooked. The buy-sell spread has already widened and bulk physical gold is delivering at $1950/oz., even as the bid has been smacked down to $1570.00.

Really? Let’s see who moves bulk at $1570, or more to the point: what entitiy that has the cash or claim to settle huge volumes of physical gives a damn about $350/oz more or less if it means the difference between physical delivery or not? Did you not read the disclaimer? We opt to cash settle in the currency of your choice mon ami.

Thoughts will change in the realization that things are not as they seem:

Sir, the plan is good, the question is, “how good is your broker”? No one can know how this world change will come about, in specifics. The gold market may lock at $400? Or $4,000! When the public perception does come to understand, many entities I know of will not be buying “at the market” as your broker will. These ones, they will be “above the market”, “well above the market”! Will you bid $1,000 ($3500?) when your broker screen shows $475 ($1650)? I myself, as a country will be “there”! You sir, will stand well behind most in line.

I tell my children, as you may tell yours: “When a thousand hungry lions fight for one scrap of food, small dogs should hide with what’s in their belly.”

Something happened during our lifetime. It was inconspicuous at first, and before we even noticed, we embraced it.

We happily gave away our right to privacy. We didn’t blame the loss on technology. Rather we let technology, and our fascination with it, turn the loss into a gain.

It became cool to let all our friends know where we are, what we are doing, who we are with, who we see, what they are doing, how we feel about it and what we do or don’t like about every moment of our lives. And we let people into this “social network” by request, so they can “follow us”. And we happily relinquish our right to privacy as if it was a burden to keep our daily thoughts and actions to ourselves.

There was a time when people had soulmates to share their more intimate thoughts with, and private time, doing things together. And people valued those private moments, protecting them from “busy bodies” who wanted to know every little detail about our personal lives. Those people were considered “nosy”, and the private matters they were so interested in were considered “none of their business”.

But today we have the technology to make our daily lives everyone’s business. And we strive to do just that. We even value the number of “followers” who are connected to our virtual existence as a form of social currency.

And through this evolutionary process, corporations now invade our privacy as a prerequisite to employment. You pee in a cup handed to you by a stern looking person, so that your prospective employer can examine what you do on your own personal time. As if your personal time cannot be separated from your work time. Much in the manner that your private life is no longer separated from your public life.

And you sign a piece of paper that allows an agency to call your friends and neighbors to question them about the nature of your character, even as most people’s character these days is an open book, a Facebook, with a Central Intelligence Interface built in.

The term “invasion of privacy” has become obsolete. Privacy now means you have something to hide, something that makes you “different”, an individual. And individuals are becoming less and less desirable these days. Dangerously independent. Anti-social.

Our cell phones track our movements, and our social media tracks our lives, our associations and our preferences. But what is really being tracked is our willingness to conform.

In Orwell’s vision of the future your privacy was invaded. But today we we welcome the intrusion. Some of us value more than anything else to be socially connected, interdependent, and part of something larger than ourselves, sharing our personal thoughts and moments, spreading our normality as far as we can reach toward the defining social norm.

Neither Huxley nor Orwell envisioned a world where the police state was welcomed with open arms by an entire generation, hypnotized by the culture of social technology. More invasions of our rights are coming. And we will welcome them with great excitement and much satisfaction.

The fantasy world of a good paying job that essentially produces nothing of value other than to stroke the egos of a handfull of pompous asses. The fantasy world of cheap energy forever. The fantasy world of home prices that NEVER fall, and easy wealth from printed paper. The fantasy world of a country that endlessly consumes far more than it produces, sustaining an entire global economy. And a world of rehypothecated bets “protecting” this fantasy with claims of more debt.

All derivatives of reality, soon to be revealed, in the simplest of terms:

Essentially, this is at the heart of the whole co-mingling situation: was MF Global using rehypothecated client gold to satisfy liabilities? The thought alone should send shivers up the spine of all those gold “bugs” who have been warning about precisely this for years. Because the implications could be staggering.

The implications ARE staggering, and the staggering has just begun. We have been deriving wealth from debt, and protecting that notional, derived wealth, with more debt-based claims (unfunded bets) heaped upon one another — designed to act as the ultimate Ponzi hedge. Such is the mathematically impossible 700 trillion “dollar” fantasy world of rehypothecated financial derivatives. And that’s just OTC derivatives.

DARE TO LET ONE DIME DEFAULT in this interconnected framework of notional debt-fantasy “wealth” protection, and the entire fiat paper system unravels, collapsing all systems, all commerce, and all the modern conveniences which we have grown so dependent upon. How does it unwind? Default on one systemic player and watch. If that one bet is off ALL bets are off. Otherwise, tax the peasants to make them whole.

But in the end, either way, you CANNOT protect claims against fractionalized physical gold with paper. Price will not “take care of it” because price will be fleeting, useless, irrelevant. Here, paper shows its true colors.

This is where the rubber meets the road in a global game of CHICKEN. The quote above merely shows how the brakes will be slammed.

Happy Weekend!

On December 1st, I wrote:

It is a coordinated effort to forstall the settlement of fraudulent, expanding debt by letting the taxpayer take the hit, instead of writing it off and letting the system take the hit. It is a perpetual way for bankers to steal from the working class, to meet the fraudulent claims of a theoretical derivative world already more “over-developed” than all the production of all the debt slaves in all the real world could ever repay – it is expanding  much faster now than the real world possibly can.

And today, Zero Hedge writes:

Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of “hypothecation, and re-hypothecation.”

Multiple layers of hypothecation. Sounds a lot like some theoretical derivative world which supports the expansion of debt more than all the production of all the debt slaves in all the real world could ever repay.

It seems to me … things are getting clearer every day.