ECON Back to basics with Exter’s pyramid - Bill Holter

[Hfcomms]

It is obviously time to go back to basics. I say this based on the emails we’ve received this week which ranged from tears to tirades regarding gold and silver price action. While speaking with a friend a few months back (during a period of price weakness), I said tongue in cheek that I should write an article titled “We are not your psychoanalysts”! The amount of fear was and is astonishing to me. We have tried to demonstrate with math, logic and history what the ending is. The problem for most is, even if the ending is understood they “want it and they want it now”!
So, in an effort to help the panicked or despondent, let’s go back to the very basics. Below is an image of John Exter’s pyramid;

You will notice the pyramid is inverted. 100 years ago, this pyramid was inverted but obviously much smaller altogether. What has happened over the last 100+ years is that more and more “derivatives” of all sorts have been created. Also, “promises” of all sorts have been made. When I say promises, we are talking about pension plans, health aid, welfare etc. that promise current and future benefits. Basically, via the use of credit (and derivatives since the 1970’s), asset values have been continually inflated and re inflated. Without credit and without derivatives, valuations of most ALL assets would be only tiny fractions of what they are today.

The size and scope of the pyramid has gotten larger and larger in relation to the base (gold and silver). Notice that as you go higher and higher up the pyramid, the assets carry more and more risk. It is the high risk assets that now make up a larger and larger majority of all assets. Thus, “systemic” risk has continually grown over the years as the highest risk assets are now the vast majority of what society considers “assets”. As a side note, everything above gold on the pyramid is “derived” from money (gold), the further away from money …the lesser connection to (think money) value.

Looking at the pyramid, the vast majority of assets are “promises” to pay or perform something in the future. Gold and silver are different, they don’t promise anything at all in the future. Rather, theirs is simply a past promise. Gold and silver only promise that capital, labor and equipment WAS USED in the past to create it. This in a nutshell is what gold is all about. It already is pure money and the capital was already expended to create it. It does not need to promise anything in the future (ie. pay interest) to have value today. For example, what value would any debt security have if it promised to never pay any interest? (Yes I know, we almost live in that world now with some debt trading at negative yields but that only proves the point of insanity in our society today!).

Look around you, everyone and everything is in debt or has value created by debt. Sovereign treasuries all over the world now have debt to GDP levels that 30 years ago were signposts to being banana republics (and they are the ones who issue what the public considers money?). Pensions are woefully underfunded even with asset values at all time (and unsustainable) highs. Credit is now regularly offered with little to no proof of ability to pay back. Loans have had maturities extended so borrowers could “fit” into the amounts borrowed. …And on the other side, we have seen lenders/investors accept ridiculously low rates from deadbeats because “they needed yield”. Don’t ever forget, the vast majority of what the world now considers “assets”, require the performance of a promise(s) to perform. When the dust settles, this statement will be wholly obvious to all!

Folks, we live in a world of promises that cannot be kept. Where exactly do you believe the capital will flow to when promises cascade into broken promises? It will be THE largest transfer of wealth in all of history …INTO gold and silver because they don’t promise anything at all. Gold and silver are already “kept promises” that labor, capital and equipment were expended to create them. They are “proof” of kept promises!

These are trying times for those logically holding gold and silver. A financial collapse should have occurred sometime over the last three years but has not. Because it has not happened yet is not in any way proof that it will not. In fact, “math” is never refuted, only delayed. I will leave you with an example; is there any possible way London has the ability to deliver 3-4 years worth of global gold and silver production to their EFP’s? It’s OK, you know the answer … yet still worry over current price?

Standing watch,
Bill Holter
Holter-Sinclair collaboration

https://www.milesfranklin.com/back-to-basics-with-exters-pyramid/

 

[Hfcomms]

FWIW I really could care less what the quoted paper price of metals are in dollars. I value my holdings in ounces I physically have. When I have an excess of fiat paper which is admittedly more and more rare today I purchase more physical and the suppressed prices are a net benefit to me. In the coming reset for the metals not to do what they have done in the past is to break 6000 years of established human history. It's an insurance policy and not an 'investment' imo.

 

[Raggedyman]

It's an insurance policy and not an 'investment'

that's absolutely THE reason to have it . . .

 

[Dozdoats]

Some insist that Exter's Pyramid is outdated, defunct, no longer applicable. Time will tell whether this theory is right or wrong.
=======================

The original version -

John Exter was an American economist, member of the Board of Governors of the United States Federal Reserve System, and founder of the Central Bank of Sri Lanka. He is also known for creating Exter's Pyramid.

Exter is known for creating Exter's Pyramid (also known as Exter's Golden Pyramid and Exter's Inverted Pyramid ) for visualizing the organization of asset classes in terms of risk and size. In Exter's scheme, gold forms the small base of most reliable value , and asset classes on progressively higher levels are more risky . The larger size of asset classes at higher levels is representative of the higher total worldwide notional value of those assets.

John Exter - Wikipedia
en.wikipedia.org/wiki/John_Exter

 

[duffer]

I do believe that it's more important to build up our treasures in heaven, but I'm not so sure about how much of that I'm really doing...

 

[TerryK]

I am having a hard time believing the real estate and physical commodities are any less a real asset than gold.

Golds value (what it is worth and what you can get in exchange for it) is speculative in nature just like real estate or any physical commodity (which gold also is), The main advantage of PMs as I see it, is that they are usually very portable.

Many other commodities such as land however, can be traded OR used to produce other things of value.

I am not discounting gold or silver. I own both, and will hold until either they are necessary to survive or I die and my children take possession. BUT the same could be said for my property, weapons and other tools.(and unlike PMs, they have practical utility and uses that help me everyday)

 

[hiwall]

The trouble with real estate is you have to always pay taxes on it, even when it is just sitting there. Also unless it is bare land, you have upkeep on the buildings. And real estate can drop rapidly in value, sometimes so much that it is almost impossible to sell at any price. Nothing wrong with Real Estate, it is just another asset with it's own set of issues.

 

[marsh]

I notice cryptos were not included. Although they are considered pure fiat, the process of mining and accounting- labor and energy expended in the block chain process, is essentially a "promise kept." Would it be considered a parallel system or where does it fit in the pyramid?



'

 

[Dozdoats]

Exter died in 2006 before cryptos were invented. At this point I'd expect them to be placed pretty high on the pyramid, around derivatives etc. YMMV of course.

 

[TerryK]

The trouble with real estate is you have to always pay taxes on it, even when it is just sitting there. Also unless it is bare land, you have upkeep on the buildings. And real estate can drop rapidly in value, sometimes so much that it is almost impossible to sell at any price. Nothing wrong with Real Estate, it is just another asset with it's own set of issues.

What you say is true, but there is more to the story.
You have to live somewhere. Yes you pay taxes and insurance and upkeep, but even if you are renting a place you are indirectly paying for every one of those things and more (profit to the landlord and the interest on his mortgage if he has one)
Also it has been my experience that the taxes on any of the 4 homes I have owned have been far less than the eventual profit I made on the properties when I eventually sold them.

Also don't forget that if you own gold and need to sell it to cover some sort of personal emergency, and the government is still up and running you will have to pay taxes on any profit you made between the buying price and the selling price. Save your receipts
Profit on a home sale is generally tax free for most people as long as they invest in another home within an couple of years.
Don't forget that assets like land and tools can be used to produce food or make things of value also. PMs can't do that.

I absolutely agree with you about assets in general. They all have their unique set of issues. Another reason to be diversified,
There is even a place for cold hard cash in your readily available assets.

 

[West]

I notice cryptos were not included. Although they are considered pure fiat, the process of mining and accounting- labor and energy expended in the block chain process, is essentially a "promise kept." Would it be considered a parallel system or where does it fit in the pyramid?



'

In the clouds above the pyamid.

JK...

Carry on, and except my apology, I'm a bad comedian.

 

[Cohickman]

I do believe that it's more important to build up our treasures in heaven.

I agree completely. I do also believe we must be good stewards of the gifts give while surviving until then.

 

[kytom]

exters pyramid showed how money went in good times up to the kondratieff winter. it eventually found its way to real money, gold. also remember central banks buy and sell gold, not silver. silver is a commodity just like platinum and palladium.

 

[Profit of Doom]

exters pyramid showed how money went in good times up to the kondratieff winter. it eventually found its way to real money, gold. also remember central banks buy and sell gold, not silver. silver is a commodity just like platinum and palladium.

Not sure how in ties to your post and “no silver for banks” but I found this a few years ago.

http://www.kitco.com/ind/Chapman/nov252002_2.html

11/13 Ralph Johnston - Silver Dream

Silver Dream

I had a dream last night. A silver dream.

It all starts with a regime change in the Latin American republic of La Plata. The new president is swept into office on the heels of 2000% inflation by an electorate fed up with IMF-induced bank failures. On his second day in office, El Presidente appoints a new central bank governor, an economist and former labor leader, who quietly informs the central bank's silver lease counterparties that the leases will no longer be rolled over. The silver must be returned at the end of the current lease term, 55 days hence, or the central bank will go public with announcement of the default. But the physical silver cannot easily be repaid, because it is long gone, having been sold into the spot market and used in industrial production a decade earlier. So the counterparties, large New York firms, have a challenge.

A distinguished New York financial executive and former US Treasury Secretary quietly contacts the La Plata Central bank governor and quietly proposes a settlement: a 20 million dollar contribution will be made to the central bank governor's favorite charity, and the leased silver will be offset by forgiving a substantial amount of La Plata Brady bonds. Surprisingly, though, the central bank governor replies no dice -- and by the way, Bob, El Presidente says to tell you that he's planning to retire those Brady bonds with La Plata reals, not US dollars, at the official exchange rate. Why should Yanqui bondholders be treated any better than La Plata bank depositors?

Over the next two days, the bribe offer is raised, first to 40 million dollars, then to 75 million. The rejection of the final offer is accompanied by a leak to the London financial press that El Presidente is considering appointing a blue-ribbon commission of La Plata business leaders and economists to study the concept of metal-backed currency. In Manhattan the message is received, and in a series of conference calls between New York and Washington the policy is established: default on the La Plata debt will be averted, at least in the short term, by assuring that the leased silver is promptly repaid. Initially it is assumed that Treasury, Exchange Stabilization Fund and Department of Defense silver holdings will be sufficient to meet the crisis. But a series of phone calls quickly reveals that in the past three decades, US government silver holdings have been drawn down from several billion ounces to near zero. The only stocks readily available are 320,000 ounces being held in the West Point mint and slated for production of US Eagles. This inventory is a small fraction of the amount payable to La Plata in 41 days, and the clock is ticking.

As the New York banking cartel enters the physical silver market, seeking sufficient bullion to repay the Plata Central bank, lease rates skyrocket. But some among the very few holders of substantial quantities of physical silver in good delivery form sense that the game is reaching its end, and refuse to come to market with their metal, even at higher lease rates. As the bullion bankers slowly begin to assemble the physical position they will need to meet the La Plata delivery date, industrial silver users are crowded out of the leasing market. Even before the La Plata deadline is reached, a series of cascading delivery defaults occurs, culminating in rumours that the US photo giant McCartney-Black will furlough its employees and close its plants for a few days because its just-in-time deliveries of silver, formerly supplied by the bullion bankers from leased stocks, will be delayed.

Meanwhile, as the leasing market is quietly falling apart, Comex trading continues. As Comex players first observe the higher lease rates, and then begin to hear rumours of impending delivery defaults, the bulls among them aggressively increase their long positions. For two days, silver prices fall in the face of strong buying, as two New York firms meet the buy orders with even more aggressive naked short writing. But on the third day, McCartney-Black, with the failure of their primary market -- the leasing market -- enters the Comex and begins taking physical delivery. This is contrary to long-standing practice and handshake agreements, but what else can they do? The instant the longs see this, they demand physical delivery, too. There is less than 100 million ounces in the Comex warehouses -- 35 million already certified. Mercifully, the stampede is curtailed by the early closing time of the precious metals markets, still on their post-September 11 shortened hours after more than a year.

That afternoon, reassuring statements are issued by the heads of the Comex, the CFTC, McCartney Black, and the Federal Reserve. The principal financial news television network spikes the story, and the major international television news channel downplays it on their evening financial broadcast. But it's too late; the word is out.

The next morning, every bar in the warehouse is committed, and silver opens limit up. Now, the only thing that can happen, does: in an action reminiscent of 1980, the Comex announces new rules: all silver contracts are to be settled in cash, and no new silver positions are to be opened.

Both of the two markets for physical silver have now ceased to operate, first the primary market, which is the OTC leasing market; then the secondary market, the commodity exchange. On the exchange, silver is still officially open for business, but as the ask rises above the limit, trading ceases.

Industry needs silver to operate. With the sole exception of photography, for which silver is a major input factor, manufacturers' cost of silver is a very small fraction of total production cost, but silver is essential to their processes, and no other element can substitute for it. Electronics, medical, auto, and defense producers must have small but steady inputs of silver. All have transitioned to just-in-time inventory practices, thus demand is urgent. The cost of curtailing production is huge, so the price of silver is very inelastic. It is a repeat of the 1990s’ run-up in palladium prices, but this time the demand is from every industrial sector, not just from auto manufacturers. A new, third market must emerge immediately to serve the industrial users. Nebraska-Western, a publicly traded holding company with large silver bullion holdings, quietly informs the purchasing managers of the twenty largest industrial users of silver that 80 million ounces in good delivery form is for sale at the London warehouse -- at a price of fifty dollars an ounce, cash and carry. McCartney-Black immediately charters a jet aircraft out of Gatwick and wires many dollars to a bank in Omaha.

The fiction of a Comex silver market is officially maintained. But the market immediately perceives that Nebraska-Western's price is the real market price. McCartney-Black and Nebraska-Western have agreed not to disclose their deal, but New York's Attorney General, now beginning his campaign for President as a crusading reformer of financial fraud, gets a copy of the contract from McCartney's CFO in exchange for full immunity, and leaks it to New York's newspaper of record. When the editors determine, under pressure from the New York bankers, that the story is unfit for print, the AG provides it to a small Connecticut paper, whose editor gleefully breaks the story.

As the public learns of the real price of silver, but is unsure how long it will prevail, small hoards of bullion and scrap come to market. Recyclers pick through their piles of circuit boards, recovering silver that was previously uneconomic. Eighty thousand silver bugs start bringing their bags of Kennedy-era silver coins to smelters and coin shops, a couple of bags at a time.

Mutual fund companies are bombarded with inquiries about silver funds, but none exist. Fund analysts are quickly redeployed from telcoms to silver, and they quickly conclude that there are only two first-rate silver companies in the world. Both are Vancouver-based. One is a miner, one is an explorer, and both have been acquiring silver properties at bargain prices during the long bear market. Their combined market cap is less than US$300 million, or was up until a couple of days ago. The shareholders of these companies sell a substantial fraction of their holdings to mutual fund managers, and invest the proceeds in gold.

Holders of physical silver and silver mining shares reap sizeable gains, but long futures speculators longs are disappointed. The exchange compels cash settlement of futures contracts at the official exchange price. The President of the United States, invoking unconstitutional emergency powers, declares silver to be a vital war commodity, imposes price controls, sets the official price at the commodity exchange level, and declares that anyone who has invested in silver and actually possesses it is a greedy hoarder and an international terrorist. After all, you’re either with us or against us. The chairman of Nebraska-Western immediately ceases selling his company's silver holdings, which are protected from U.S. government seizure by virtue of their offshore location. In response to inquiries from purchasing managers, Nebraska-Western says it will await the day when legal trading resumes at an economically rational price point. Later, in exchange for immunity from war profiteering charges, the company's chairman quietly agrees to sell twelve million ounces to the U.S. government at the official price, to be used in critical defense manufacturing.

It's just a dream. It didn't really happen.

 

[West]

If we're going back to basics...

"The Coinage Act of 1792 defined the dollar as 1.7 grams of gold or 27 grams of silver, but these weights are for "standard" purity of about .900 fineness."

If and when we finally get rid of the FIAT systems a dollar will trade at a much higher value in silver as well as purchase power.

Maybe not happen in my life time. Don't really care if it doesn't. My stacks can go back to the earth forever. And I'll pass heavy in silver and piss poor. So be it. Besides in todays world you have to pay for protection for identity theft if you have a high credit rating. Whats credit today with all FIAT currency?

Muse that being poor and with poor credit one will have less worries of identity theft. Also if one is really poor (but has a stack of PMs and TS does HTF will have a lot less to lose than one with a million in the closed bank accounts, a million in credit and the best credit rating that is now un-noteable because the system is down, or levied ny the government, etc..

 

[Dozdoats]

I had a dream last night. A silver dream.

With a simple declaration of force majeure, the dream turns into a nightmare.


Standard clause found in construction and supply contracts, it exempts the contracting parties from fulfilling their contractual obligations for causes that could not be anticipated and/or are beyond their control. These causes usually include act of God, act of man, act of parliament, and other impersonal events or occurrences. French for, superior force. Also called irresistible force.

Read more: http://www.businessdictionary.com/definition/force-majeure.html

And no one could predict any of the above? Yeah, sure.

 

[JF&P]

The most powerful weapon that the Dark Side (Deep State) is using is DEBT!!!

I've noticed at the State, County and City Level....huge bond measures for inconsequential projects....

California is a perfect example.