Gold Daily and Silver Weekly Charts - Gresham's Law, Mispricing of Risk, & the Synthetic Gold Carry Trade

"Gold is unique among assets, in that it is not issued by any government or central bank, which means that its value is not influenced by political decisions or the solvency of one institution or another."

Salvatore Rossi, Central Bank of Italy, 30 Sept 2013


Real gold does not fear examination or the furnace.

Chinese Proverb


"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


"You have to choose between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

George Bernard Shaw


"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort."

Antony C. Sutton


Gresham's law is an economic principle that states:  When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.

And this is why gold is flowing from West to East.

There was a fairly lengthy intraday commentary on gold and silver which you might wish to read here.   It covers quite a few topics related to the precious metals.

Surprisingly enough there was an actual delivery of silver at The Bucket Shop yesterday as Nova Scotia stopped 43 contracts for its 'house account.'

Otherwise it was the same old, same old with price going down or nowhere in the highly leveraged, synthetic markets of New York, and with physical bullion slowly leaking out of the warehouses.

The question is not whether or not the financial markets are going to slide into another crisis.  The only real question is when, since there is little to no interest in reform.

"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

Have a pleasant evening.

Foreign Holdings of US Dollar Assets

Roughly analagous to Eurodollars, although it is not clear how much if any of the central bank reserves are actually captured here in these reports by BIS reporting commercial banks, especially in China and the non-European countries. Certainly the NY Fed Custodial Accounts for Foreign Central Banks show no decline whatsoever from the long term trend of accumulation to support their mercantilism and currency pegs.



But the takeway from this chart is that a long term trend of dollar accumulation was broken, and rather painfully, in the deflating of the Wall Street financial assets fraud.

One might not expect the Europeans and Asians to accept new financial instruments in dollars quite so readily. The US seems intent on maintaining a few mega-banks to serve as "competitive" instruments of national policy on the world financial stage.

They may find that maintaining the banks and their particular weapons of financial mass destruction may be just as costly as 700 military bases in diverse locations. Such are the burdens of empire.

Sumitomo Forecasts Dollar to 50 Yen, End of Dollar as Reserve Currency

"We can no longer stop the big wave of dollar weakness," said Daisuke Uno at Sumitomo.

Nothing goes straight up or straight down. Look for corrections in the precious metals and the dollar, and the strengthening currencies such as the Aussie dollar, which seems headed to US dollar parity. However, the macro trend is apparent.

We get a chuckle over this dollar weakness when free market people like Steve Forbes come out and look for market intervention to stop it. The market is taking the dollar where it should be, where it needs to go. If only countries with obvious pegs and ongoing manipulation to support export mercantilism were also to allow their currencies to float more freely. It is going to kill off global trade. It is the great failure of the WTO and US trade policy to have allowed pegs and overt currency manipulation policies which are de facto tariffs and subsidies on trade.

A 'crash' in the US stock market, should one occur, will temporarily jar nearly everything. More likely is a long slow slide as in the second phase of the Great Depression, from 1931 to 1933.

Monetary inflation can make the nominal charts more palatable as it is doing today. The problem is that all Ponzi schemes come to bad ends.

The only way out, the only viable path, is for the US to embrace a serious reform of its markets and its financial system, and to change system that encourages the debilitating corruption of decision-making in Washington, which is under the influence of an army of well-heeled lobbyists.

To that extent, the "straight talking" pre-Palin version of John McCain had it right. Little serious reform can be done until campaign finance and influence peddling in Washington is addressed. McCain saw the danger of this conflict of interest in his own career as part of the Keating Five, and his own party and the rise of the neo-con statism and its assault on republican ideals.

The Democrats have shown themselves to be no better, having gone down the slippery slope of Clinton capitalism, the partnership of special interests and government. Obama failed when he embraced it. And now both parties are deep in the mire of corruption.

The banks must be restrained, and the financial system reformed, and balance restored to the economy, before there can be any sustainable recovery.


Bloomberg
Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says
By Shigeki Nozawa

Oct. 15 (Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”

The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to as low as 75.211 today, the lowest since August 2008.

The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen.

“We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency. Hossein Ghazavi, Iran’s deputy central bank chief, said on Sept. 13 the euro has overtaken the dollar as the main currency of Iran’s foreign reserves....

The Dollar Carry Trade

A video from Warren Pollock regarding carry trades