Philip Judge on Phase Transition in 2014
The town of Lugano lies on Lake Lugano nestled in the Swiss Alps in Italian-speaking southern Switzerland, arguably one of the most beautiful old towns in all of Europe. Dinning in Lugano one evening last month with Alex Stanczyk and Jim Rickards, the conversation turned to ‘Complexity Theory.’ Jim spends several pages describing details of the Theory in Chapter 10 of his excellent bestselling book Currency Wars: The Making of the Next Global Crisis (1).
One thing I learned from the dinner is that Complexity Theory is complex. However, the theory could be summarized as follows:
Complex systems continuously produce surprising results. When systems are highly complex, emergent properties are far more powerful and unexpected. A great example Jim points out is climate which is one of the most complex systems humans can study. Despite thousands of years of observing and studying climate and weather patterns, and despite all the science and tools we have at our disposal today, it is still not possible for us to accurately predict the weather more than four days in advance due to its complexity.
Another important aspect of Complexity Theory is what is known as ‘Phase Transition.’ Phase Transition describes when a complex system changes its state. Again, Jim uses two good examples from nature. When a volcano erupts, there is a Phase Transition in the state of the volcano from dormant to active. A second example would be an avalanche. Snow may fall on a steep incline for a long period of time; however, eventually the snow field will reach a critical state. Finally, one single snow flake will trigger a Phase Transition called an avalanche. Phase Transition demonstrates how catastrophic effects can be triggered from small causes; a single snow flake can cause a village to be destroyed through an avalanche.
Yet another feature of Complexity Theory is the frequency of ‘Extreme Events.’ Conventional wisdom suggests that small events happen all the time, while extreme events happen rarely. Manmade systems grow in size and complexity all the time, while more manmade systems become connected and interconnected. As the group of manmade systems grow in size and complexity and as a whole move toward critical state, the risk of catastrophic Phase Transitions grows exponentially. “If the size of the system is doubled, the risk does not merely double – it increases by a factor of ten. If the system is doubled again, the risk increases by a factor of one hundred. Double it again, and risk increases by a factor of one thousand, and so forth,” states Jim. This leads to a point where Extreme Events are no longer happening rarely but are happening all the time.
The forces that combine to contribute towards a volcanic eruption are continually working away underground and behind the scenes. This can sometimes go on for many decades with no apparent outward change in the appearance of the dormant volcano until the day it explodes its molten rock and ash into the atmosphere.
This year of 2013 has been yet another year of massive change. Around the globe both economically and environmentally we are now in a period of a huge Phase Transition. It bears repeating here that the rate at which our manmade economic, financial, monetary, and agricultural systems have grown in size and interconnectedness has greatly increased the complexity of our global system in recent years. Further, the pace of growth in size and interconnectedness continues to grow exponentially each year.
Like the volcano that appears dormant but is in reality on the brink of eruption, throughout 2013 AFE has communicated to our readers, friends, and clients that not all is as it appears in our financial system. While most eyes in the West have been entertained by Fed policy, talk of tapering, and the S&P500, the real significant developments have been in the precious metals markets, and more importantly, the geopolitics behind the precious metals markets. AFE has reported that as the price of physical gold has dropped this year (2), the West has been divesting itself of its gold which has been swiftly shipped East and gladly swept up at bargain basement prices by the Chinese. All throughout 2013, the world’s most strategic financial asset has been moving from the West to the East. What will that mean for us living in the West in 2014 and beyond?
We have been watching and reporting the extremely real possibility of a physical short squeeze in the gold and silver markets coming in the very, very near future. While the gold price reaches lows in recent months, major refineries are unable to keep up with production, and more significantly, obtain sufficient gold supply to fill Asian demand. All of our London sources confirm the same; twelve months ago at the close of 2012, London vaults were packed to the ceiling with gold bars. Now you could walk into these same London vaults, and they are virtually empty (3). All of that gold has been transferred out of London towards the East and most likely will never come back to the West.
Today’s world conforms to all the principles and characteristics of Complexity Theory. The vast majority of people (in the Western world, at least) are oblivious. They are distracted by the pace of day-to-day life, while mainstream information flow keeps them from recognizing that we are in the midst of a major shift – a Phase Transition that I believe will shape our future on the planet for generations to come. Others, however, recognize that the world is in the midst of a Phase Transition. Sophisticated and smart thinkers understand that when a volcano is on the brink of transitioning from dormant to active, that is the perfect time to get well beyond the reach of its potential destruction.
In 2014, AFE will stay true to our original charter and purpose; to assist individuals, entities, and institutions in creating a private and secure financial ark in a world of Phase Transition. We will continue to report developments as they come to hand from our qualified sources and strategic relationships.
All of us at AFE would like to wish our readers, friends, industry colleagues, and clients a happy, prosperous, and safe holiday season and start to 2014.
Philip Judge and all of the AFE Team
(1) This brief summary is sourced from pages 200 – 212 of Currency Wars by Jim Rickards. Also watch for Rickards’ latest book Death of Money due for release in early 2014.
(2) Throughout most of 2013, mainstream financial media have reported the gold price movement with headlines like: “Gold Bull Market Over,” “Gold Price Collapse,” “Gold Worst Performing Financial Asset.” These alarmist headlines don’t reflect the reality that gold is in the top five performing assets in the last ten years. The real picture of Asian gold imports has also not been accurately reported. The following numbers are calculated in US dollars using the close-of-year price (London AM Fix last trading day of the year):
2000-2001 + 1.4%.
2001-2002 + 24%
2002-2003 + 22%
2003-2004 + 4.3%
2004-2005 + 18%
2005-2006 + 23.5%
2007-2008 + 3.4%
2008-2009 + 27%
2012-2013 – 28%
NOTE: The 2013 price used is 20th December 2013 London AM Fix.
The year 2012 – 2013 is the first year to show a negative growth in 13 years. The average growth in the gold price during this 2000 – 2013 period has been a little over 13% annually.
(3) Recently reported by Bloomberg’s Ken Goldman and further independently confirmed by AFE London sources.