01 September 2015

The Investment of the Millennium: 'Pet Rocks'

"Gold has worked down from Alexander's time.

When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory."

Bernard M. Baruch

Who would have thought it?

So why haven't the precious metals been 'working' since they spiked higher in 2011?

"We hypothesize that, having learned from the misadventures of the 1960s, the policy elites, well-versed in the practice of financial engineering and market manipulation, would have seen no need to dump stocks of government gold reserves onto the market, 1960s style, to keep the price in check. 

Instead, synthetic gold, sourced in pyramids of credit extended to bullion bankers by central banks with little or no claim on physical substance, have provided a more efficient, better-camouflaged form of intervention. COMEX synthetic gold and related over-the-counter derivatives are traded in macro strategies implemented by hedge funds, high-frequency trades, and commodity funds in pair trades with interest-rate, currencies, equity futures, or even more exotic offsets. The volumes traded are huge, and bear little resemblance to actual flows of physical metal. 

We suspect that shorting gold has come to seem like a riskless proposition as long as there is confidence in the Fed. Synthetic gold is the perfect substance for a carry trade: an easy borrow with very low carrying cost and little upside basis risk. Such a hypothesis, in our opinion, does much to explain the incongruity of a declining gold price while fundamentals for paper currency, and the U.S. dollar in particular, obviously deteriorate; while demand for physical gold has exceeded new mine supply for several years running; and while above-ground 400-ounce .995-gold bars located in London, New York, and other financial capitals (in cohabitation with speculative trading activity in paper markets) have steadily dwindled and disappeared into Asian financial centers reformulated as .9999 kilo bars."

Tocqueville Gold Newsletter 2Q 2015

The physical market at some point is going to come bearing consequence for the schemes of the financiers.

I suspect that when the 'riskless proposition' of shorting gold starts to more visibly unwind, most likely under some significant duress, we are going to see what kind of rot has been concealed, and the bottom feeders that have thrived on it, as when the tide goes out.

This unwinding started in the spike in the metals after the financial crisis of 2008, but was held off by massive 'currency interventions' to 'save' the Western financial system in 2011.

Gold rose in 2009 from about +150% to +775% at the end of 2010, as measured from the beginning of the millenium in 2000.

The real longer term consequences of reckless monetary policy and irresponsible financial deregulation and a tolerance for massive frauds are still ahead of us.

Perhaps I am incorrect in this.  But nothing I have seen in the data makes me believe so.

Gold is still flowing in large numbers from West to East, and the central banks are still net buyers.

And once the bull market in metals resumes, which I believe that it will, the upside will be similar to the increase which was seen in the years from 2009 to 2011.

Change is coming.  That is the only certainty.  At some point I may be sharing some more thoughts about how this change might manifest it, and what forms the new 'closing of the gold window' may take.