Stocks and Precious Metals Charts - Managed Complacency - The Grand Equilibrium

“It has been more profitable for us to bind together in the wrong direction than to be alone in the right one. Those who have followed the assertive idiot rather than the introspective wise person have passed us some of their genes. This is apparent from a social pathology: psychopaths rally followers.”

Nassim Nicholas Taleb, The Black Swan


"Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction." -

News dispatch from Washington, January 21, 1930


"The even larger problem is that there is a kind of chronic complacency that has been rotting American liberalism for years, a hubris that tells Democrats they need do nothing different, they need deliver nothing really to anyone – except their friends on the Google jet and those nice people at Goldman. The rest of us are treated as though we have nowhere else to go and no role to play except to vote enthusiastically on the grounds that these Democrats are the 'last thing standing' between us and the end of the world.It is a liberalism of the rich, it has failed the middle class, and now it has failed on its own terms of electability."

Thomas Frank, 2016

The markets want to see a 25 basis point cut from the Fed's FOMC meeting, which will announce its decision around 2 PM.

They are also going to be listening very carefully to Chairman Powell's press conference, and are expecting some kind of reassurance of the Fed's support for equities and the Banks.

Stocks were a bit wobbly today but managed to rally into the green in the late afternoon.

The Dollar was lower, while gold and silver edged higher. The VIX fell.

After the bell Fedex announced a miss in earnings. They also cut their outlook, citing global macro slowdown. The stock was being spanked rather thoroughly after hours.

Adobe also missed its results after hours.   Smells like teen spirit.

There will be the September stock market options expiration on Friday.

Need little, want less, love more. For those who abide in love abide in God, and God in them.

Have a pleasant evening.

A Currency War That Few Economists and Analysts Notice, Much Less Understand

"The enormous gap between what US leaders do in the world and what Americans think their leaders are doing is one of the great propaganda accomplishments of the dominant political mythology."

Michael Parenti

Most economists and financial analysts think that 'currency war' merely refers to the competitive devaluations that nations sometimes engage in to help boost their domestic economies, as they had done in the 1930's for example.

This time the currency war is a much more profound confrontation of differing agendas revolving around the historically unusual role of the US dollar, based on nothing more than the will of the Federal Reserve and the 'full faith and credit' of the US, as the reserve currency for global central banks and international trade.

When a single nation begins to wield such an 'exorbitant privilege' to underwrite the speculative excesses of a crony capitalist banking system, and perhaps even more importantly, as an instrument in support of their international policy, one ought not be surprised that the rest of the world will begin to resist it.

A currency must be policy neutral, without regard to any party if it is to be a true medium of exchange.  Can this still be said of the US Dollar as it has been managed, especially since 1990?

As Alan Greenspan once correctly pointed out, but certainly did not heed when he was at the Fed, if a fiat dollar is managed by monetary policy such that it emulates gold, then it will be perceived as fair, and will certainly be above the particular domestic issues or international policy biases of a single nation that de facto wields the reserve currency status.

"And so it is an odd situation where all the central bankers -- while none of them are advocating a return to the gold standard -- nonetheless try to replicate the various types of interest rate policies that the gold standard would have created. And it is an interesting question whether you call that regulation, or basically functioning of a central bank in stabilizing the economy."

Greenspan: Role of Central Bankers Is To Emulate the Gold Standard

It might help one to understand this if they were to imagine a world in which Russia, for example, in a quirk of history had established the ruble as the benchmark currency for the world.  The ruble was recommended for use by all nations as the means of paying for oil,  and for settling international trade even when Russia is not involved in the transaction.  Each country was thereby compelled to hold a substantial portion of its international reserves in rubles.

And how would one be likely to react if the Russian Central Bank started using the ruble as an instrument of their international policy and extension of their quest for imperial power?  What if they began creating more rubles to underwrite the domestic bubbles which were created in their own corrupted financial system to bail out their banks and oligarchs?

And let's be serious and think 'like the other guys' for a moment.  What if some other nation that held the enormous power of the world's reserve currency was exhibiting a crop of candidates for their leader like the current choices for the US Presidency?   I would expect that some of the rhetoric being tossed about in these debates would send a chill to the very bottom of our toes.  Who could place their confident trust in their good and selflessly wise judgement to do the right things for other nations around the world, even if it might not favor the powerful special interests that give them so many millions in campaign donations?

Would you be content if your own government went quietly along with this abusive sort of monetary system?  Is this not indeed taxation without representation when the money supply is expanded and handed over directly to the hands of a few Bankers?

The intransigence of the Anglo-American financial establishment to recognize the legitimate issues of the rest of the world with regards to the manner in which they have conducted their control of the IMF, the World Bank, and the international reserve currency has ignited a currency war that is now becoming increasing visible, to just about everyone it seems except for those sequestered in their ivory towers at the heart of the Empire.  Or perhaps they think it too dangerous to even acknowledge that it exists, because then they might be compelled to render an opinion on it.

This is a 'big event' and it is all the more remarkable because the policy makers in the US act as though it is not even happening, or is not happening for any of the reasons for which it is.  They prefer to view it as a challenge to their authority, and to react uncompromisingly and with force.

I think that historians will find the start of the currency war in the Asian currency crises and the fall of the Russian ruble in the 1990's, with the roots of it in the closing of the gold window by Nixon in 1971.    But from the following essay it seems that China and a few astute Western observers have marked it as being visible from March 2015.

But whatever the date of its commencement, this dispute over the international monetary regime is the basis for the ongoing currency war that seeks to rebalance the terms of international trade and finance.

It is the old story of the very powerful resisting change that benefits the few of them inordinately. And as in so many wars of the past, those few who benefit from it do not include the bottom 90% of their own people at the least.

Most economists and analysts are ignoring this, or are unaware of it.  When they do finally wake up they will likely get busy finding ways to justify it, or dismiss it as an issue, and 'prove' that there is nothing wrong with it.  And very few will acknowledge the price of it in terms of economic stagnation and human misery.  All is well.

Here is an excerpt of a recent article that was published in Chinese and then translated into English in the journal of the International Monetary Institute in Beijing.  (It is a little funny that they published his last name as Widdlekoop, but if you were writing in hanzi would you know if a similar looking character is upside down?)

Has the US Lost its Role as the Underwriter of the Economic System?
By Willem Middlekoop

The recent news that Britain aspires to become one of the founding members of the new Asian Infrastructure Investment Bank (AIIB), has shocked many. Larry Summers, who served as a Secretary of the US Treasury between 1999 and 2001, immediately understood the significance of these developments, and wrote in an op-ed for the Washington Post:   'March 2015 may be remembered as the moment the United States lost its role as the underwriter of the global economic system. I can think of no event since Bretton Woods comparable to the combination of China's effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out.‘

This British announcement was highly criticized by the US. The Financial Times quoted an unnamed US official:  'We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power. This decision was taken after no consultation with the US.‘

Summers was also highly critical of the US‘ strategy toward the newly founded AIIB: 'The U.S. misjudged the situation tremendously, put pressure on allies and developing countries to under no circumstances be part of AIIB. Largely because of resistance from the right (neo-conservatives more precisely), the United States stands alone in the world in failing to approve International Monetary Fund governance reforms that Washington itself pushed for in 2009. By supplementing IMF resources, this change would have bolstered confidence in the global economy. More important, it would come closer to giving countries such as China and India a share of IMF votes commensurate with their increased economic heft.‘

With Britain and many more major European countries signing up as founding members of the AIIB, the US economic hegemony has been dealt an enormous blow. For the first time since the end of the Second World War, the US is not in the driving seat during the foundation of a highly significant global institution. Of course, this will not change the world economic system overnight, but when we look back in five, ten or even fifteen years‘ time, March 2015 may be remembered as a turning point in economic history...

Another criticism is that the US move to more neoliberalism and global capitalism since the 1980‘s, has led to a change in the functions of the IMF. Critics claim allies of the US receive 'bigger loans with fewer conditions‘. Foreign governments who are non-allies have to sacrifice their political autonomy in exchange for IMF-funds and often have to sell assets crucial for their economy to foreign (often US) companies.

The former Tanzanian President Julius Nyerere, who was angered that debt-ridden African states were forced to hand over their sovereignty to the IMF (and World Bank), once asked:  'Who elected the IMF to be the ministry of finance for every country in the world?‘ And now the Chinese have openly asked for a 'new world wide central bank‘.

Joseph Stiglitz, a former chief economist at the World Bank, has also agreed that the IMF 'was reflecting the interests and ideology of the Western financial community‘. The 'helpful hand‘ by the IMF and World Bank towards military dictatorships friendly to the West‘ has been criticized as well.

It might be remembered as the start of an openly Chinese confrontation with the US over the world‘s economic leadership. As Summers points out, all of this has taken place because the Chinese leadership has had to wait a full five years for a change in the IMF-voting structure...

Willem Middlekoop, International Monetary Review, International Monetary Institute, Beijing July 2015, page 32

China, World Reserve Currencies, the SDR, and an Emerging 'Gold Standard'

“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

I thought this was interesting, particularly given the source of the interview at Bloomberg News.

It is short and so a little bit of a light touch perhaps, but a nice overview nonetheless.

 

One little point of fact I would raise is that the comparison of China M2 and the US M2 is not the whole story.  Since China is not a particularly international currency their M2 is probably a significant subset of their overall issuance. 

 

But in the case of the US, M2 does not account for 'eurodollars', which the Fed intentionally stopped tracking some years ago 'to save money' and thereby stopped issuing M3 figures.  This is a significant factor for the world's reserve currency as you might imagine, and a glaring omission in the validityof the comparison.

A key factor would be their price peg mechanism vis a vis the dollar, and any redeemability features.

They must approach this carefully, because the Anglo-American Banks and Funds will be using every trick of the trade if the yuan becomes less restricted, whether it is tied to gold or not.  

 

If they price it too cheaply, and the gold is redeemable, I can see the great flow of gold from West to East reversing to fill the pockets of the naked shorts.

But if they price it too highly, they cold do some damage to the value of their currency for international trade. I am not saying that they can't do it. And I do see them taking many of the steps required to do this sort of things well.

 

The inclusion of China as a reserve currency for global trade and the SDR has been a bubbling issue for a while.

 

The kind of 'pure fiat regime' we have had in place since 1971 is an historical secular event compared to the great stretch of monetary history. Typically the valuation of an enduring, widely used currency is tied to something external that disciplines its creation. 

But that is history, and our new masters of the universe are beyond the limits of human nature, like gods unrestrained, at least in their own minds and theories.

I should add again that I am not so sure about the power and reach of a gold standard at this point, given the exceptionally fraudulent and distorted nature of the financial system and the devious natures of unreformed, felonious denizens. 

 

Moral hazard is the rule of the day and the intentional mispricing of risk almost a benchmark.  I am sure the global financiers are already planning on how exploit such a development in their paper markets.

 

Our economists and bankers may have their faults, but they are the Michael Jordans of financial fraud.

What Is Happening With Gold: Russian Economist Mikhail Khazin - Of Volatility and Collars

There are some interesting observations contained in this excerpt of a recent interview with Russian economist Mikhail Khazin.   He is not speaking on behalf of the Russian government, so we must take his opinions as we may from a private individual observing things from a different corner of the world.

 Here is a bio of Mr. Khazin.

I found some particular interest in his views on the price of gold, and the approach of Russia and China in buying physical gold on the world markets, without attempting to break the leverage of the paper gold markets directly. 

This would of course lead to increasing volatility in the price of precious metals until a market break provides the opportunity for the paper and physical market to converge.  Mr. Khazin believe this will be triggered by the bursting of the next financial bubble. 

Whether this scenario should actually come about is a matter of some speculation.  I do not know what Russia and China will do, and how the West might respond. So we should look carefully at the accumulation of gold by Russia and China, and the general buying patterns of other central banks as well.

One might expect the speculative exchanges to take some steps to protect themselves from increasing volatility, such as establishing trading collars or limits, in the price of gold and silver.  Oh my.

This is just a brief portion of an interview covering a number of topics. You may read the entire interview here.

 

"It had been clear to many economists for a long time that the role of gold in the world will grow and, most likely, will return to its position as a single measure of value. In particular, we wrote about the current crisis back in 2004 in our book The Decline of the Dollar Empire and the End of the Pax Americana. There's a whole chapter devoted to the role of gold and its manipulation.

However, Russian economic leaders close to the IMF ignored this position at the time. This only began to change in the last couple of years. China has been serious about gold for almost the entire last decade and is now actively preparing for a potential transition to a 'gold standard,' at least in economic relations between the so-called 'currency zones' which, in our opinion, will emerge after the single world dollar system falls apart.

But Russia and China cannot stop these manipulations, because the price of paper gold is determined on the speculative dollar markets. They can’t provide 'leverage' that would be comparable to that of major U.S. banks that have access to an unlimited issuing resource. The only thing they can do is increase the gap between the price of 'paper' and 'physical' gold by constantly buying the latter on the world markets.

Of course, this increases the instability in the global gold market and creates potential losses for the main 'gold dealers' who work with the Federal Reserve on leasing programs, but the degree of imbalances has not reached a critical value yet. It seems to me that the sharp rise in gold prices will start after the burst of the next 'bubble' in the US stock market.

With regard to the potential price of gold, as I wrote back in the early 2000's, it is determined by a 'fork,' the lower limit of which is the gold price in 1980, when it had its local peak after the dollar was decoupled from gold (USA default) in August 1971, and the upper limit of which is the purchasing power of the dollar in the early twentieth century, when gold was actual money. Today this 'fork' (in current dollars) is seen somewhere at the level of $ 4,500 - $ 15,000 per Troy ounce."

BRICS Launc $100 Billion Development Bank and Currency Reserve Pool

And so it begins.
 

The big changes happen slowly.

I expect the BRICS to continue 'tinkering' with the meaning of reserve currency in the global financial system.

Reuters India

BRICS set up Bank to Counter Western hold on Global Finances

By Alonso Soto and Anthony Boadle

FORTALEZA Brazil

Wed Jul 16, 2014 2:56am IST

(Reuters) - Leaders of the BRICS emerging market nations launched a $100-billion development bank and a currency reserve pool on Tuesday in their first concrete step toward reshaping the Western-dominated international financial system.

The bank aimed at funding infrastructure projects in developing nations will be based in Shanghai and India will preside over its operations for the first five years, followed by Brazil and then Russia, leaders of the five-nation group announced at a summit.

They also set up a $100 billion currency reserves pool to help countries forestall short-term liquidity pressures.

The long-awaited bank is the first major achievement of the BRICS countries since they got together in 2009 to press for a bigger say in the global financial order created by Western powers after World War II.

The BRICS were prompted to seek coordinated action following an exodus of capital from emerging markets last year, triggered by the scaling back of U.S. monetary stimulus. The new bank reflects the growing influence of the BRICS, which account for almost half the world's population and about one fifth of global economic output. The bank will start with a subscribed capital of $50 billion divided equally between its five founders, with an initial total of $10 billion in cash put in over seven years and $40 billion in guarantees.

The bank will start lending in 2016 and be open to membership by other countries, but the capital share of the BRICS cannot drop below 55 percent. The contingency currency pool will be held in the reserves of each BRICS country and can be shifted to another member to cushion balance of payments difficulties. This initiative gathered momentum after the reverse in the flows of cheap dollars that fueled a boom in emerging markets for a decade. "It will help contain the volatility faced by diverse economies as a result of the tapering of the United States' policy of monetary expansion," President Dilma Rousseff said.

China, holder of the world's largest foreign exchange reserves, will contribute the bulk of the contingency currency pool, or $41 billion. Brazil, India and Russia will chip in $18 billion each and South Africa $5 billion. If a need arises, China will be eligible to ask for half of its contribution, South Africa for double and the remaining countries the amount they put in. Negotiations over the headquarters and first presidency were reached at the eleventh hour due to differences between India and China. The impasse reflected the difficulties that Brazil, Russia, India, China and South Africa face in working together to build an alternative to the Bretton Woods institutions dominated by the International Monetary Fund and the World Bank.

"We pulled it off 10 minutes before the end of the game. We reached a balanced package that is satisfactory to all," a Brazilian diplomat told Reuters.

Negotiations to create the bank dragged on for more than two years as Brazil and India fought China's attempts to get a bigger share in the lender than the others.

Stark economic and political differences between the BRICS countries have made it difficult for the group to turn rhetoric into concrete action in coordinating policies.

Where We Are At In the Global Precious Metals Markets - A Framework

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.

Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."

Edward 'Steady Eddie' George, Governor Bank of England 1993-2003

The general hypothesis I have put forward over a period of time at this café is that with the spike in the price of gold up to $1900, the central banks of the West became greatly concerned, and opted for a lower price, and a more orderly rise.  And so the price of gold was smacked down into a trading range between $1540 and $1780 through the various price and market operations of some central and bullion banks in what we can think of as a gold pool.

As you may recall, the great sea change was that central banks turned from being net sellers to net buyers of gold, slowly over a ten year period from 2000-2010 approximately.  This change of policy was not uniform, but driven largely from the emerging and re-emerging nations. It ought not to surprise us. No fiat currency has survived for long in historical terms, and even fewer as the world's reserve currency, unless backed by an unassailable empire. They will fall to Triffin's Dilemma, and the decay of power to self-serving and short-sighted corruption. 

Forces similar to those that are working against the EU monetary union, without a comprehensive political union, are working against the dollar global reserve currency, on a much larger and slower paced scale.  This is why a global currency issued and controlled by one central entity tends to presume a one world governance, or at least a cohesive governance of a rather large piece of it.  It is not incidental to their financial goals.

In late 2012 the Deutsche Bundesbank requested, albeit under some domestic political duress and after a polite request to audit the gold was deferred, to have the return of some portion of their nation's gold from its wartime home in New York and Paris.

The NY Fed responded with a rather surprising timeline of seven years for the return of what ought otherwise be a fairly doable amount of gold, despite what the Lord Haw Haw's of the Western gold pool might otherwise have you believe.  The gold pool is a consortium of central banks, bullion banks, and purveyors of paper gold in various unallocated forms who are beholden to a vested interest in a very powerful status quo.

In their desire to control the price of gold, the gold pool has leased out a fair amount of their national bullion holdings to the bullion banks, who in turn sold it into the markets to hold down the price.  A rising price was risky for the confidence of their paper money, and rising demand placed a strain on their ability to supply additional gold to supplement what the miners could produce.   And so it appears that Germany's gold was unavailable.

With the unfortunate circumstance of the gold of the German people threatening their deal to maintain confidence in their currency arrangements,  the central/bullion banks of the West were once again 'staring into the abyss.'   

How could anyone even imagine that government sources, who traffic in public confidence, could allow such a thing to happen, to blatantly abuse their powers, and prevaricate to the public?  It would be a tremendous loss of face, and personal career risk.  And so absent a whistleblower, the goal is to keep the game going at all costs.

So starting in late 2012, a major push began to manage physical gold away from the West's ETFs,  to relieve the short term supply constraints, which involved driving the price lower, and once again mobilizing the troops to talk the metal down.  Please notice the difference in the inventory of silver and gold, both of which had comparable price declines.

This gambit worked to some extent in the West, but overall it failed, miserably.  Demand for physical bullion skyrocketed in the East, as Asia took advantage of the lower bullion prices to increase their official/private offtake of bullion.  The West rehypothecates, but Asia takes.  And that taking presents a heavy toll to a highly leveraged trade.

Apparently the people of Asia for the most part did not agree with the Western economists and brokers that gold was undesirable, for whatever reasons they hold, with a strong basis in human history I should add.  Let's call it a difference of opinion amongst 'peers.'

In a very real sense we should remember that gold is gold, and the price of gold is more like a currency exchange rate than the price of a commodity.  And so one can think of this entire scenario as a major defense of the dollar at some ideal exchange rate to gold, in much the same manner that the Bank of England sought to defend a particular valuation of the pound.

So here we are today, with gold at a level somewhat below $1250 and silver at $20.  And the Comex deliverable gold is at record lows, and indications, albeit somewhat difficult to obtain, of continuing strains for producers (e.g. miners) to continue adding to supply, in the face of a shrinking discretionary market for physical gold (scrap, ETFs, exchanges).  And those who are managing the floats in the market, the unallocated, forward sold, and rehypothecated, are fundamentally shitting their pants, and seek to sit in it with smiling faces lest they give their vulnerable positions away.

The gold pool can rehypothecate and leverage physical gold by multiples into paper, and outright create it with naked short selling.  And they can sell this paper in bulk at whatever they wish in the markets which they control. And they can use positional advantage and their media to bully boy anyone who dares to question this into silence.  But they cannot print gold bullion and deliver it to Asia, which quite frankly does not care what they say. 

In general this is what is referred to at the divergence between the paper and physical gold markets.  It is what happens when 'semi-official' forces endeavor to set an artificially low price in a market that involves some physical commodity which is in a somewhat limited supply.  It tends to become more limited as a result. 

But the supply of paper gold is not limited, especially where things like position limits and leverage are given the wink and a nod behind a wall of opaque obfuscation. And like the reckless fools that they are, they decided late in 2012 to press their advantage hard, with shock and awe, and they are failing.

So this is why I think things will unravel in a manner similar to the London Gold Pool's operation which sought to set an artificially low price.  How exactly this will unravel is a matter of much conjecture.  I doubt it will break at the source of the paper gold, given the power the insiders have over the rules and information there.  Rather, there is more likely to be a strain at some physical delivery source that will cause the current pool to back up the price higher to some more sustainable level.  What that will be I cannot say.

What is driving this current dynamic is what is called the 'currency war,' which is shorthand for a difference of opinion amongst the world powers over the existing global currency trade regime, and the trustworthiness of the financial system that supports it.

China, Russia, Brazil, Venezuela et al. have lined up their interests against the Anglo-American banking cartel which rides the wave of dollar hegemony.  

If you think about this a bit, how would you feel if China's yuan was the world's currency, in which your country held its savings, and with which it paid for important and useful things like oil.  And what if China decided it could print as many yuan as it liked for its own purposes, thank you very much, and distributed them as they wished to its favorite banks and friends.  You would not like it one bit, it would make you rather uneasy, especially if the Chinese mouthpieces in academia started talking about trillion yuan platinum coins to resolve their own internal political corruption.

So, the most likely outcome is a compromise, in which a basket of currencies and a commodity or two like gold, are bundled together into an artificial currency for world trade.  This way no one country, or group of countries, held the 'exorbitant privilege' of owning the world's currency. 

Quite to the point, I think much of what we are seeing now is the 'negotiation stage' of this process.  It is not so much a question of outcome, but rather, of price.  What is to be included and at what valuation to the various world currencies.  I would be stunned if there was a return to an actual gold standard.  I would prefer to see the price of gold float freely without an official government valuation or the thinly disguised monkey shines of the Comex.  But such antics seem to be de rigueur in most financial markets as we have recently learned.

As you might imagine, the existing power structure might choose to continue to fight this rather aggressively, since there are no such enjoyable privileges as exorbitant ones.  Especially if there is a partnership between the political and financial class to maintain their privilege for themselves and their favorite one percent of their constituents.  But they must also contend with their waning power, and significantly low approval and discontent at home.  Pushing questions of one's authority are ill-advised when you cannot be sure of the answer.

And perhaps the biggest unspoken risk-that-must-not-be-named is the credibility trap.  What will the people say if they discover that the Bankers have taken their gold in order to give it to their banking cronies for short term profits?  Yes they will wrap it in rationalizations, excuses, jingoism, and personal immunities, but when the cards fall on the table, the thefts will be uncovered.

So here we are.  Those who think they know what will happen next probably have not given it sufficient thought.  I have a range of ten scenarios, in four major groupings, that are all fairly plausible.  There are some very large exogenous variables involved that no one can predict with much accuracy.

Perhaps some day I will categorize them more cleanly and attempt to lay them out. But for now it is enough work to know what to look for. Watch the UK as I have said, as it may be a bellwether for various reasons of size and composition, and continental Europe, to see if they will accept the role of a 'patsy' for the Gold Pool.   And of course watch China and Russia, and the areas of tensions around them.

What happens next is that one way or the other change will come. Of that I am sure.

Gold Daily and Silver Weekly Charts - Currency Wars

I have concluded that it is almost impossible to understand what is happening in the precious metal markets without understanding that the world is in a currency war,  And this includes how the currency war is being conducted, and why.

The US dollar reserve currency arrangement to support world trade was created in the waning days of World War II, with the demise of the gold standard and the ascendancy of the Pax Americana.  It is called the Bretton Woods System.  It evolved quite a bit since then, especially when Nixon closed the gold window in 1971 and declared the US dollar a purely fiat currency.  Since then the world has gotten by on what some have called Bretton Woods II.

After sixty years, it is fairly clear that the dollar trading regime has had a good run, but has now outlasted its effective life span. The nail in the coffin is the economic instability in the US, and the need for the Federal Reserve to go to ZIRP and print buckets of money to support their domestic policy needs.

While this makes sense for the US, it does not make sense for the rest of the world. This is similar to the reason why the Eurozone is failing. The ECB conducts monetary policy to suit the needs of a few core countries, and the periphery suffers. And that monetary policy is covering up the rot at the core I might add.

The situation is similar with the dollar and world trade. The Anglo-American Banking cartel grew up around the US dollar reign, and is still very powerful, being supported by most of the systemically important international banks.

But all things come to an end, and the world is looking for a better solution to the world as it is now, not how it was sixty years ago. But change comes slowly and with difficulty.

I will be very surprised if gold and silver do not play a role in what is to come.

I did remark on this and also on bitcoin intraday. You can read it here.

Great changes are occurring, that cut across political and economic lines.  And these are manifesting as a 'currency war' that is much broader than a mere race to devalue and manipulate national currencies to support industrial trade policies.  Always keep that in mind.

Have a pleasant evening.

Jim Rickards on the May 12 IMF Meeting:SDR as World Reserve Currency

Rickards has a target of $2,000 for gold in the near term, and $5,000 for the intermediate term.

ECB has capitulated on the monetization of debt and joined the Fed, but it is hard to see how this will really solve the problem.

Europeans are running to buy physical bullion, rather than paper pledges in a kind of a 'run on the bank' over fears of the future of the Euro.

The subject of the meeting in Zurich yesterday was for the G20 to discuss the composition and role of SDR's as a reserve currency.

Triffin's dilemma: need for a 'liquidity pump' to drive world trade, someone who is able to sustain deficits without going broke. Now that the US is going broke, a new source of liquidity has to be found.

Rickard views SDR's as pure fiat on a pro rata basis. He does not see any accountability on the part of the IMF or any sort of external control.

While I see some of his points, I think Jim is confused about the notion that the SDR is a 'basket of currencies,' that already exist, unless they are changing the basis of the SDR to debt of their own issuance. I was not at all clear on this, and I would be a little surprised if that is the case.

What the IMF has been proposing with the support of the BRIC countries, is to put the SDR forward as a 'clearing mechanism' for international trade. They are also actively lobbying for a recomposition of the SDR to shift some of the monetary authority from the west to the east.

If the SDR is a 'basket of currencies,' each with their own debt balance sheet, and the SDR is not intended to replace or supplant domestic currencies, and especially if the SDR contains some element of gold and silver, then I view it as a natural development from the Bretton Woods system, and the failure of the US Federal Reserve to responsibly manage its currency 'like it was a gold standard.'

The IMF is attempting to replace the US dollar as the world's reserve currency with a portfolio of major fiat currencies, with the notion that the result will be more stable, more diversely based. Again, an element of gold and silver would further strengthen it.

I could be mistaken in what the IMF intends. But I have seen nothing to indicate that yet, and I think for now that Jim Rickards is mistaken in the assumptions underlying some of his statements.

IF the IMF decides to create a fiat currency of its own, and call it the SDR, and base it solely on its own balance sheet, with an arbitrary ability to expand and distribute it, then it really is the beginning of a new world order, and a one world government. But for now I do not see that to be the case. I can find no statement on the IMF homepage to this effect.

Why not go directly to a gold and silver standard? The greatest obstacle is that the Anglo American nations, or more properly their central banks and politicians, would not accept it. It would be inimical to their monetary power and financial engineering. The US Federal Reserve will not even agree to be audited by its own government! And do you think they would agree to the constraint of an external gold standard? This is a highly political as well as economic topic, and to ignore that is to completely misunderstand what is happening.

An evolutionary path to something less arbitrary than the dollar, but not quite as strict as gold, is most likely. This is being driven by China and Russia and the developing countries, and on the other side of the table are the Anglo-American banks, and to a less extent, Europe, after having been whipped into place by assaults on its monetary union.

It is an interesting interview. I only caution that more details need to be given from the IMF on what they are doing before conclusion can be drawn. I have been expecting this for a long time, and it is a development that the BRIC countries have been lobbying to obtain. The Anglo-Americans exert considerable influence over the IMF. This is a classic struggle for power between the old world powers and the developing world.

This is not to say that I am comfortable with the IMF. I have attempted to lay out the parameters to assess what they are doing with respect to a basket and clearing house versus a completely new global currency. Since the US and UK hold inordinate sway over the IMF, we have to be aware of the possibility that the IMF could merely become a much larger successor to the Federal Reserve, and owned and controlled by the Anglo-American banking interests. This is why gold and silver are the ultimate solution, and why the status quo will oppose them with all their power.

His follow on discussion of how hedge funds and financial institutions can attack a nation's currency using derivatives is very worth hearing.

Click here to listen to the Rickards Interview on King World News.

Currency Wars

"In his latest letter, Mylchreest reckons we are now in the ‘Third Gold War' since the Second World War and this is being waged between the USA in conjunction with other western countries/institutions, notably the IMF, and various opposing sectors worldwide. In his contention, the U.S. and its allies lost the first of these ‘gold wars' to the French (then under De Gaulle) and the second to the Middle East, helped significantly by the then pro-gold stance and purchasing power of the German Deutsche Bank .

This latest Gold War has been/is being fought covertly. "High profile sales of physical gold have, for the most part, been replaced by sales of "paper gold" in the form of futures, OTC options and unallocated gold, etc." asserts Mylchreest. But this time he reckons the veil has been lifted and the whole charade is beginning to unravel. Instead of France or Arab nations, the opponent this time is China - the 800 pound gorilla - potentially an even more formidable opponent, with a huge treasury of trillions of dollars with which to back its moves. It's not just that it is the Chinese government which is the major participant, but also now that gold and silver ownership is being promoted to the populace there by government institutions, there is the huge pent-up, and growing interest in precious metals of the rapidly increasing Chinese middle class and its potential to affect the global demand patterns."

China: the Gorilla in the Third Gold War, Lawrence Williams

The gold war as described above is just one front in a greater and more general 'currency war' that is evolving as the empire of 'the US dollar as the reserve currency,' which has been in place since the end of WW II, declines and finally falls in the profligacy and crony capitalism of the Federal Reserve Bank and the Treasury.

This battle may manifest itself more publicly later this year in the debate over the reconstitution of the basket of currencies that the IMF's Special Drawing Rights (SDR) will contain.

What Will Be the New World Reserve Currency

Russia Calls for Changes to the SDR

The SDR may not be the successor to the dollar hegemony in the short term. The BRICs may lobby hard enough to legitimize it, and even to include some gold and silver content in addition to the fiat currencies of a greater number of countries. I do not believe that they can be successful without some support from the Petrodollar countries in the Mideast.

I realize that the SDR is just another fiat currency, a somewhat artificial construct for the accounting of international trade, a fiat of fiats if you will. It may even be inherently unstable in the midst of the controlled demolition of most fiat currencies that is now underway.

But from a portfolio perspective it could be useful to take some of the power to control the world's money supply away from the Anglo-American banking cartel and its politicians who have proven themselves to be unworthy of such a great responsibility.

I don't think a direct transition to specie is feasible. Inclusion of gold and silver in the SDR provides an evolutionary path.

One cannot help but wonder if the current bear raids on the EU and the euro by the financial predators and economic hitmen, the gangs of New York, is designed to bring them to heel in the SDR debate tne this phase of the currency war, and to diminish the potential role of the euro in the newly created basket of world currencies.

If the new currency unit the SDR is used only for international settlements and reserves it may be successful. However, if it is promoted as a general currency for domestic usage, then one only has to look at the current troubles in Europe to understand what a trap this is.

Unity of currency without unity of government and fiscal policy and taxation is difficult if not impossible to maintain. One world currency is the step to one world government. And those who control the currency will, almost inevitably, control the people of the world.

"Basically, what Economic Hit Men are trained to do is to build up the American empire. To create situations where as many resources as possible flow into this country, to our corporations, and our government, and in fact we've been very successful...We knew Saudi Arabia was the key to dropping our dependency, or to controlling the situation. And we worked out this deal whereby the Royal House of Saud agreed to send most of their petro-dollars back to the United States and invest them in U.S. government securities...The House of Saud would agree to maintain the price of oil within acceptable limits to us, which they've done all of these years, and we would agree to keep the House of Saud in power as long as they did this, which we've done, which is one of the reasons we went to war with Iraq in the first place...So we make this big loan, most of it comes back to the United States, the country is left with the debt plus lots of interest, and they basically become our servants, our slaves. It's an empire. There's no two ways about it. It's a huge empire. It's been extremely successful...This empire, unlike any other in the history of the world, has been built primarily through economic manipulation, through cheating, through fraud, through seducing people..."

John Perkins, Confessions of an Economic Hitman

“Currency warfare is the most destructive form of economic warfare."

Harry Dexter White, US Representative to Bretton Woods, 1944

"History teaches us that the capacity of things to get worse is limitless. Roman history suggests that the short, happy life of the American republic may be coming to its end... [the US will probably] maintain a facade of constitutional government and drift along until financial bankruptcy overtakes it. Of course, bankruptcy will not mean the literal end of the United States any more than it did for Germany in 1923, China in 1948, or Argentina in 2002-03. It might, in fact, open the way for an unexpected restoration of the American system, or for military rule or simply for some development we cannot yet imagine. Certainly, such a bankruptcy would mean a drastic lowering of our standard of living, a loss of control over international affairs, a process of adjusting to the rise of other powers, including China and India..."

Chalmers Johnson

Russia Continues to Build Its Gold Reserves Ahead of the SDR Discussions

Thanks to Dave at Golden Truth for this updated chart.



As you know, Russia, India, China and some of the BRIC-like countries will continue to push hard for a gold and silver content in the new formulation of the SDR this year. The US and UK are vehemently opposed.

Europe is still wallowing in confusion and is virtually leaderless, as the most recent financial crisis in Greece shows. This may not be all bad, because it highlights the weaknesses in their union, and gives them the incentive to take it to the next step.

One cannot have a common currency with uncommon fiscal policies and laws. While there is some room for discretion, it is sorely tried in changing economic conditions and social attitudes. America went through a bloody Civil War for this reason.

This is why a one world currency, except for international trade only and at the discretion of trading partners, is so dangerous. One cannot maintain their sovereign freedom when someone else controls the supply of their money: either you cheat or you submit. All serious economists understand this; too few of the voting public do.

What Will the World Currency Become? The Stakes Are Enormous

And the Winner Is...the SDR?

This is the fallacy of the US dollar as the reserve currency for the world. It 'worked' as even Mr. Greenspan noted, as long as the US dollar was able to demonstrate the objective stability of an external gold standard relative to other currencies. That lasted for a few years, and the rest is foreign policy and currency wars. The time for its replacement is long past. The BRIC's understand this, and are playing their hands accordingly.

If one submits to a single world or regional currency for domestic use, they may as well take their constitutions and individual rights and throw them away. And globalization has been serving as a proxy for this, paving the way.

Gold and Economic Freedom: Did Greenspan Know What He Was Doing? - ZeroHedge

The moves here are slow and subtle, since great nations are involved. I get the impression, though, that most traders are playing checkers at a chess match. Well, that works for the daytrade. But only time will tell what will happen, and when. But sometimes events can break free and move quickly. Best to gather those nickles off the freeway before the rush hour commences.

Or as the man behind the .50 cal would say, 'Git some. Come git some.'

Gold Holdings And the Evolution of Global Trade and Wealth

What fascinated me about this information is that countries that have much less of the official gold, that is gold held by the governments, are leading the effort to recast the SDR with some gold content in the changes scheduled to take place later this year. And they tend to be the high growth nations with the greatest commitments to exports. And it was a bit of a surprise to see that the Eurozone exceeds the US in total assets by volume. I did not know that. Of course, one may argue about the qualitative unity of the Eurozone. But the big holders of gold there are clearly the core of the union. This chart does not address the issue of gold holdings which may be leased out and sold to the private sector but still listed as an asset, but held as hedges, derivatives, and deep storage, that is, claims on ores yet to be extracted and in some cases even discovered. What is also fascinating, as shown below, is that if one looks at the gross levels of official gold holdings the total was steadily decreasing up until last year. Since there is an annual increase in total gold from mining activity, and very little loss through industrial use that is not subject to later salvage, it appears that there was a steady transfer from the public to the private sector. Essentially the private sector has been taking all the new gold production and official sales for an extended period of time. We have to wonder what sparked the spectacular bull run in gold starting around 2001 from about $250 to $1000+ per ounce? I can assure you, the bankers of the world think about this, and frequently. Since we are denominating gold here in US Dollars, there is an obvious negative correlation of sorts as the dollar moves higher and lower in perceived value by the world. But that does not explain the fact that gold is in a bull market in most of the world currencies except for a few of the commodity exporters and safe havens. Is gold a bubble? As someone who has been a close observer of bubbles for the past ten years the data does not recommend that conclusion. And what makes me even more curious about this point of view is that the very people who for the most part denied the existence of the obvious bubbles in tech, housing, risk, banking and credit, even to the point of absurdity, who could not or would not see a bubble if it perched on the end of their nose, who are card carrying members of the international monied fraternity, are the most vocal in calling gold a bubble with emotional arguments lacking any fundamental data. What's up with that? Some people, like Willem Buiter, have recently made silly and distracting arguments regarding their very subjective opinion about gold. That opinion does not bear all that much weight given gold's long history and broad use as a store of value, more enduring than anything else in recorded history. In other words, an opinion is like a vote, and you are casting your one vote in the face of countless votes of millions of people over the span of ages -- so your opinion is worth what it is worth, to you. It is the supply and demand that interests me. And it surely interests the monied powers, who seem to come out strongly in disfavor of gold and silver at certain intervals when they start getting nervous about the grip they have on the reins of the world's financial markets in paper. The sillier and more baseless their comments, the more my interest. So you will forgive me for seeming rude, but I do not care about your opinion, whoever you may be. I do not even care for my own opinion. I only care for what can be known. A good part of me is on the hunt for knowledge here, and whether you believe it yet or not is of little consequence to the outcome. You may as well spin opinions about the likely path of a truck as it bears down upon you where you stand. Only the trajectory and the mass of the truck matters, and the ability to step out of its way in a lively manner. Given the price action, it is hard to find a more 'popular' commodity as expressed in the action of buying by private individuals with disposable wealth, that at the same time is so seemingly 'unpopular' with public officials, and a genuine antipathy by the world bankers, and so little noted by the general public. The 'gold parties' that people were pointing to as a sign of a top were for companies to BUY gold in the form of old jewelry from the public, not for SELLING it to them and often at preadatory prices, despite the misleading spin from the mainstream media. I like data anomalies. They are so interesting. As Holmes observed in the story Silver Blaze, "Why didn't the dog bark?"

Gregory of Scotland Yard: "Is there any other point to which you would wish to draw my attention?" Holmes: "To the curious incident of the dog in the night-time." Gregory: "The dog did nothing in the night-time." Holmes: "That was the curious incident."

I cannot think of any single economic phenomenon that is more interesting in recent time, say the past 100 years, than the evolution of global trade, the basis for its exchange, and of course the official reserve holdings that are a natural outcome of this. For if one understands that the power to set and control the currency essentially trumps all local fiscal policy issues, there is almost nothing more important than the path which this evolution takes. Valuation and the ownership of the 'standard' of monetary valuation is key, and yet so little remarked, so little discussed in public. I try to resist the temptation to suspicion that statists are driving towards a unified command and control economy. I do not think that this agenda is the basis for formal discussions, except perhaps tangentially in the hallways of Davos. There is an impetus to power, and more power, that can create the same effect in groups of men without the need for formal discussions. Financial engineers and bankers will alway seek more control and more power, because they are seeking to master something that is a portion of human nature, that does not lend itself easily to linear manipulation. As their plans fail, they need to keep expanding to prevent a collapse and their personal humilitation. This is inherent in what they do. This is how dictatorships are created; they seem to be the easier path to inability, if not incompetency. But it is obvious that the theme since the 1980's at least has been the will to power, the knocking down of laws and regulations, to allow the most powerful to do what they will, to take an even greater share of the riches of the world, to the disadvantage of the many. And my hypothesis is that the global reserve currency is a key plank in this agenda. Perhaps this is such a perennial theme that is almost a tautology to remark about it, like a boy who first discovers the wonders of love, and thinks himself a Balboa discovering new oceans. Perhaps this boy is just discovering in a more profound way the deep roots of the darker side of human nature, the basis of evil: pride, greed, and deceit. But there is an ebb and flow in the tides of men, and the rise and fall of nations, ideas, and fundamental values like freedom, justice, honour, duty, mercy, equality, and hope. And we are certainly at the cusp of a trend change, a trend in place since the second Great War, and the dog is not barking. The game is afoot.

What Will the World Reserve Currency System Become? The Stakes Are Enormous

The deterioration of the dollar reserve currency regime is obvious.

If we have forecasted correctly, the world will look to some variation of the IMF's Special Drawing Rights as an eventual replacement for the US dollar. Therefore, the recomposition of the SDR next year will become a lightning rod for the global stresses created by an increasingly unstable and impractical system of global trade.

As you may recall, Russia and China have called for the inclusion of more currencies such as the rouble, the yuan, the Aussie and Canadian dollars, and gold and possibly silver into the mix. The BRIC's seem determined to break the western dominance of global monetary policy.

This may also explain some of the highly emotional,and we would say nonsensical, arguments attacking gold and silver by some of the house economists for the western Banks, and their camp followers and hand puppets in the universities, of late.

The bankers are appalled at the prospect of the new SDR including gold or silver in its new composition to be set in 2010. And so they are jawboning ahead of it. Any country can build its gold and silver reserves in the open market, and the big central bankers find it difficult to manipulate their supplies to their own advantage, despite years of desperate efforts to substitute paper for metal.

Bad enough that the basket may include currencies of non-G7 countries. As you will recall, the G7 was formed when Canada joined the Group of Six: US, Great Britain, France, Germany, Japan, and Italy. The power balances of the post World War II era are changing, and the shifts in trade and financial power reflect this.

In the interim, there will be regional currency arrangements and trading blocs as in the past. The strength and suitability of the new SDR regime will help to determine the disposition of these regional arrangements.

'Free trade' without a floating monetary exchange system is not possible. Otherwise there will be artificial subsidies and penalties among nations, as in all systems of price control. These lead inevitably to imbalances, bubbles, and crises.

The adjustments that are overdue for the dollar and renminbi in particular will make political progress difficult. But the greatest impediment to progress will be the Anglo-American banking cartel, which seeks to control the issue of money as a means of implementing policy and distributing wealth, especially with regard to the natural resources and labor of the developing nations.

Emirates Business Dubai
Do We Need a New Reserve Currency?
By Martin Wolf
Sunday, December 27, 2009

A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America's economy and the greenback is fuelling a "currency-regime crisis," says Martin Wolf, associate editor and chief economics commentator of the Financial Times.

Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar's role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.

Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. "You can't have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.

"So I agree with this. And I'm absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that's not sold by just adding another couple (of currencies). It actually means having a global money."

Indeed, Wolf said he's in complete agreement with China Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency "most credibly and convincingly."

"On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it," said Wolf. "Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession -- the dollar is not adequately supported."

The US currently has a national debt in excess of $12 trillion or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108 billion. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.

Apart from the economic risks posed by the decline of the US dollar, China's devaluation of its currency is causing "a real problem" for Europe. The "very perverse currency adjustment" is highly destabilising for the euro zone economy and could create a crisis, said Wolf.

"There is nothing to prevent this, unless the Europeans decide they are going to intervene in the foreign currency market to buy dollars, and that would be over (European Central Bank president) Jean-Claude Trichet's dead body."

As there is "no chance" of European governments intervening in the foreign exchange markets to improve the competitiveness of the euro, it will result in major currencies such as the euro and Japan's yen becoming "very vulnerable."

"This is simply the American way of shifting the recession from them to their trading partners," said Wolf.

"What we need are global currency adjustments and it has to include the renminbi and global macro adjustments in those countries which make this less painful."

"In terms of the impact of this on the role of the US dollar as the currency of denomination for international transactions, basically I think it's become very unreasonable."

"Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value," said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China, and India, Wolf argues, adding that the greenback's loss of credibility as the dominant global reserve currency is part of this messy transition.

The Americans no longer have the means to save themselves, this is what I think people don't understand. There is no credible American policy," said Wolf. (The American policy has been to maintain the status quo and to confiscate wealth by exporting fraud in amounts that are beyond all reason. This is hardly acceptable to the rest of the world. It is remarkable how few US economists understand this for what it is. Are they so abysmally ignorant by choice or by training? Sometimes it is hard to tell. What can one expect from a group that could not acknowledge the enormous bubbles that have rocked their economy in the past ten years until the damage was done. They are as reprehensible as the doctors who helped to promulgate the psychiatric abuses in the gulag of the former Soviet Union. - Jesse)

"We need to discuss this globally in a harmonious way. It's not happening, so at the moment the euro zone is a prime victim and it will continue to be, and that will create very big problems for European-based manufacturers, and quite particularly those that are relatively vulnerable to global price effects.

"And it's a tremendous mess, a horrifying mess, and that's where we are. I'm sorry. And we've got to get through this transition as quickly as possible to a more stable global monetary system with a lesser reliance on the dollar. We're going to get there over the next 10 years; I'm sure of it. We're going to get there. The only question we have to decide is how we're going to get there."

Meanwhile, a trade skirmish between the US and China could ensue, if Beijing continues to devalue its currency to bolster export-driven economic growth at the expense of economic recovery in the US, said Wolf. (Not just the US, the rest of the world as well - Jesse)

He says China is working hard to defend the artificially low value of the renminbi in the hope that exports will pick up when external demand recovers. According to China's customs authorities, exports from January to November plunged by 18.8 per cent to $1.07 trillion from a year ago. However, according to the Royal Bank of Canada, export growth should pick up in the coming months and reach double-digits in early 2010.

China's efforts, Wolf said, will spark a "very vigorous, even vicious" reaction from the US as it's destabilising US efforts to engender an economic recovery.