Gold Has Had a 34% Correction

Here is a chart from Tom Fitzpatrick at King World News that I thought put this into some perspective. 

It is certainly worth reading his commentary, and I produce only his first chart with the rest to be seen at the source. With last night's selloff that correction is probably more like 35% or so but that does not alter the chart pattern.  He also shows his long term chart on silver.

I took the liberty of circling the secondary cup and handle that was the consolidation before that last big leg to the upside top. This is what I was referencing last night. I had not realized at that time it was a 34% top to bottom correction. I was setting down to do the longer term chart today when I came across this, and it is well done.

That secondary cup and handle consolidation marked a big resistance level that thereafter became big support after having been exceeded.

I am waiting to see what happens here.  This is a very 'purposeful' correction with selling that is blatantly timed to move prices lower in quiet markets.  But the overall timing matches with the new lows in deliverable bullion at the COMEX and the TOCOM.

Big corrections like this are not unusual in bull markets.  That huge correction in 2007-2008 cleared out the market and set up the move to the high.  

I do think that such corrections represent 'asset stripping' by powerful and lightly regulated insiders and traders who have a free hand to obtain assets on the cheap after manipulating prices lower, and then allowing them to rise again.  But who can say, except for someone like a regulator with access to the relevant information.

I do think that a turn, if it occurs, will coincide with the end of quarter mark to market.  Perhaps that is too cynical.  It is hard to imagine that one can be cynical enough after the serial frauds in market rigging we have seen in the past fifteen years.

These sorts of action disrupt normal market operations and allocation of capital that may inhibit future supply. But it is too much to think that these jokers would care as long as they are making money.  Traders and private equity managers are often short term predators, and the environment in markets has become almost pathological. 

One serious caveat is that since we are in a 'currency war,' at least to some peoples' thinking, one can only rely on market-oriented things like charts so much.  As I said, the selling is obviously purposeful.  And there are contentious issues being discussed by the world powers behind the scenes.

Source: King World News

The Longer Term Fundamentals of the Gold Market As They Are Today

There should be no doubt in anyone's mind that the fundamentals for world gold supply and demand have changed dramatically over the past ten years at least.

The world's central banks, most significantly in the West, had been selling bullion from their central bank reserves since 1989. The first chart below shows the long decline in the official gold reserves of the central banks through the long bear market from 1979 through 2000, and even in the beginning of the bull market.

There was an explicit public arrangement called the Washington Agreement struck in 1999 to regulate that official selling after a particular central bank had disrupted the market.

"Under the agreement, the European Central Bank (ECB), the 11 national central banks of nations then participating in the new European currency, plus those of Sweden, Switzerland and the United Kingdom, agreed that gold should remain an important element of global monetary reserves and to limit their sales to no more than 400 tonnes (12.9 million oz) annually over the five years September 1999 to September 2004, being 2,000 tonnes (64.5 million oz) in all.

The agreement came in response to concerns in the gold market after the United Kingdom treasury announced that it was proposing to sell 58% of UK gold reserves through Bank of England auctions (aka Brown's Bottom), coupled with the prospect of significant sales by the Swiss National Bank and the possibility of on-going sales by Austria and the Netherlands, plus proposals of sales by the IMF. The UK announcement, in particular, had greatly unsettled the market because, unlike most other European sales by central banks in recent years, it was announced in advance. Sales by such countries as Belgium and the Netherlands had always been discreet and announced after the event. So the Washington/European Agreement was at least perceived as putting a cap on European sales."

There is some speculation as to the reason why the UK's Brown decided to engage in that rather extraordinary action, against the counsel of his own advisors, but that does not concern us here. 

This outright selling in gold by central banks is different from the leasing of gold by central banks, which is generally not transparent and openly announced. In this leasing operation, bullion banks pay a small lease rate to the central bank for the right to use that gold as collateral and for sale, with the promise to replace it after a period of time with a fee. It is a subject of controversy how much of the existing stock of central banks has been committed to the market through leasing arrangements. The number is not insubstantial. The gold is likely to have been sold or otherwise committed, and must be repurchased to be returned.

There is a very high likelihood that gold collateral has been rehypothecated, or used many times with a number of parties holding claim to it. This is a common practice and is referred to as fractional gold reserves. These most often take the form of 'unallocated bullion' which is when a certificate of ownership is issued, but no particular bars have been identified. And as we saw in the failure of MF Global, even allocated bullion ownership, in which specific bars are committed and paid for, ownership can be a rather philosophical concept in which possession is nine-tenths of the law.

The second chart shows the period from 2000 to 2012, with emphasis on 'the Turn' which is when central banks turned from net sellers to net buyers of gold. I cannot stress enough how important this is to the fundamental outlook.

Economists, pundits and investment managers can say whatever they like, but the proven fact remains that the world's central banks, on the whole, do not agree with them that gold is not an important store of value, and likely to become more important in the future. It is somewhat ironic that these same fellows would uphold the power of the central bank on one hand, and say things like Don't fight the Fed, or Bernanke says what the market is, but then will turn around and suggest you ignore what the central banks of the world are doing on the whole. It is hard to imagine that this is not someone woefully ignorant of current trends or with some other agenda who would take such an obtuse position.

And of course we also have the statement and opinions of those who say, personally I think gold is barbaric and useless, but then will say, money is based on consensus, and so fiat money is sound. Again, the clear consensus of the central banks is that gold is an important facet of their reserves, and the importance to their future plans is growing, for whatever reasons they have not yet disclosed.

The third chart demonstrates the significant increase in gold bullion acquired by the Chinese. This is both private and official purchases. A large producer in their own right, China exports little of their domestic production, and is a large net importer. Several other countries are following the same pattern, the common thread being that they are the high growth countries who have the need to increase their reserves, or whose people have new wealth they wish to deploy.

The fourth chart shows the well established fact that the increase in the gold supply through mining is relatively inelastic with regard to price. It takes significant effort and capital to create new mining operations, and there is a natural decay in the productivity of existing mines as with most natural resources. The estimate is that the gold supply can increase through mining at roughly 2% per year. This is one of the features that has long made gold attractive as a form of money.

As demand increases therefore, the price of gold must rise. If someone wishes to hold the price steady, new supplies of gold must be found, and they will not be discovered in mines.

There is a fairly well established 'scrap market' in which old jewelry and other gold objects can be purchased and melted down for bullion. But this market again is not robustly elastic although it can respond to higher prices more readily than mining operations.

So for ready access to gold to meet market demands, other sources of gold must be found.

This is where we get into the concept of 'fractional reserve gold' and 'paper gold' in which ownership is more of a financial concept than a hard reality. This includes both the leasing of official reserves, and the use of unallocated reserves that would be discovered in purchasing programs and perhaps even some well known funds.

One would hope that highly transparent audits of such things would exist from impeccable sources, but sadly that does not seem to be the case.

Leverage and rehypothecation are two of the largest factors in the recent financial crises, in addition to the mispricing of risk and fraudulent representations.

I think one of the more remarkable features of the current situation is the storage of official bullion in custody in New York and London. Venezuela was one of the first countries to demand that their gold be repatriated from New York, and this has happened despite much scoffing and derision by the usual pundits.

But then in response to domestic requests and changing circumstances, the German central bank requested that some portion of their gold be returned from out of country.

The German gold had been stored out of country in response to concerns that the gold was not safe, given the divided nature of the country and fears of a Soviet incursion. Obviously with their country reunited and at peace, it would make sense to return things to normal.

They had already received much of their gold back from London, in large part because it was incurring significant storage fees. They are also requesting their gold back from France.

By 2020, the Bundesbank intends to store half of Germany’s gold reserves in its own vaults in Germany. The other half will remain in storage at its partner central banks in New York and London. With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time.

The following table shows the current and the envisaged future allocation of Germany’s gold reserves across the various storage locations:

	31 December 2012	31 December 2020
Frankfurt am Main	31 %	50 %
New York	45 %	37 %
London	13 %	13 %
Paris	11 %	0 %

To this end, the Bundesbank is planning a phased relocation of 300 tonnes of gold from New York to Frankfurt as well as an additional 374 tonnes from Paris to Frankfurt by 2020.

What is so remarkable is the response from New York. The Fed is agreeing to return a portion of Germany's gold in SEVEN YEARS. 

Until the fundamentals change, the offtake of gold will continue to deplete supply, until the price moves to strike an equilibrium.

And as I have attempted to show at some length and detail on this site, the recent sell off in the price of gold was largely motivated by speculation in paper gold on western markets, specifically London and New York, that resulted not in a decrease in demand but an increase in demand that led quickly to spot shortages, delays, and premiums over the paper price for actual bullion.

I do not know the future. It is patently obvious that China and Russia and a few other countries, are making a concerted effort to increase their gold reserves for some reason. There is significant speculation that the nations will be changing to a new form of reserve currency for trade that will be backed at least partially by gold.  In addition, several countries are said to be making plans to back their national currencies by gold in some manner as the devaluations of world currencies obtain momentum.  I think these all these plans are under serious discussion today. There is no doubt that international discussion have been going on for some time.

I am aware that there are other, more specialized and sophisticated, studies out there about the gold and silver markets.  Much of them are with regard to the shorter term for traders.  But there are a few extraordinary efforts conducted by groups like GATA, data compilers like the World Gold Council, and individuals such as Eric Sprott, who has done a remarkable job of attempting to derive the demand and supply data for gold over a longer period of time.

My goal here is to present what I like to think of as the bigger picture.  My own analysis of the global economy started in 1992 in a brief return to academics, and a natural interest as someone involved in international business. 

Starting with the Asia currency crisis of the 1990's and the collapse of the rouble, my thinking led me to assume that there was going to have to be a significant change in the structure of the global trading arrangements with regard to currencies.  Up to that point in 1999 I had no interest in gold whatsoever.  I discovered gold and silver in my process of thinking about other things, and everything I had anticipated seems to have been unfolding, with variations of course.

There is the little detail that the second credit bubble tied to housing has collapsed, and the powers that be will not take the banks down, but are going to try and reflate the financial paper, particularly bonds and equities, by devaluing the major developed currencies.  They are doing fairly well of hiding its effects, but at some point it is going to bite.  A lot of the shenanigans going around now are trying to position the public, weakest segments first, into picking up the tab.

Make of this what you will, but I think the facts are sound. I suggest you look at this, and then come to their own conclusions.  It may provide a framework with which to interpret events as they continue to unfold.

Performance of Stocks, Bonds, and Gold In an Inflationary Environment

Jeremy Grantham's GMO group has produced an interesting study showing the performance of three asset classes against inflation.

I think the true correlation is with negative real interest rates rather than inflation itself. In an inflationary period, interest rates tend to lag the increase in inflation, producing negative real rates.

But in a period of economic decline in which the Fed lowers rates artificially, negative real rates can also be created and rather more easily than some amateur economic theorists believe.

To slightly complicate matters, the markets tend to anticipate, tend to act on expectations before the reality of something. So we might see something like gold or interest rates signaling a period of inflation well ahead of its appearance, if they are allowed to seek their own levels in the market.

If you think about it, the correlation with negative interest rates makes sense. In a period of negative rates, all currency heavy financial instruments are probably facilitating the confiscation of wealth by the official banking system. Since gold has relatively little counterparty risk if properly held, it is likely to be considered a safe haven, in addition to other hard assets and stronger alternative currencies if such things are available.

Unfortunately for analysis, things are never so simple in real life.

In addition to negative interest rates, there are other forms of wealth confiscation, including the fraudulent mispricing of risk, outright fraud itself, and currency devaluation.

And finally, there is the sort of price manipulation which the Western central banks engaged in for a long period of time in strategically selling off portions of their gold in order to hold the price lower in a disastrous attempt to manage the financial markets and silence the warning signal from gold as asset bubbles began to build in the credit markets and the Bretton Woods global monetary agreement began to fall apart.

And so what might have been a gradual price increase in gold and silver instead became a powerful rally as the markets sought to correct to the primary trend once the banks stopped being net sellers of gold.   Now the financial system can only use other means in order to try and control their ascent to a genuine market clearing price based on years of monetary inflation.  There are various estimates of what that eventual price might be, but it most certainly is much higher than where the price is today.

Years of underinvestment in mining has created a dangerous shortage of gold and silver relative to potential demand.  Various financial instruments have been introduced to provide 'paper gold and silver' to meet that demand.  In addition, even physical exchanges like the LBMA have been pushed to dangerously high rates of leverage as demand for bullion outstrips available supply.  And so the markets drift inexorably into great opaqueness and repeated frauds because the world of paper has unhinged itself from reality across multiple fronts.   The problem is that the state of the currency feeds into all finanical markets and so a mischief done there spawns its children everywhere.

As one might suspect, the credibility trap in which the financial engineers find themselves causes occasional outbursts of hysterical animosity and antagonism against the reactions of the markets, and the reality of their own economic chickens coming home to roost. 

This is a recipe for disaster, and we can thank the Anglo-American banking cartel, and their gullible accomplices in the other western banks, for it when it happens.  When Dick Cheney said, "Reagan proved that deficits don't matter" what he did not realize was that he was reading the epitaph for the dollar reserve currency system that had been in place since the end of WW II.   They do matter, but sometimes the lags in time between cause and effect can be deceptively reassuring.

Debt may not matter in the short run, and Keynes had some very good and valid points to make about government stimulus during short periods of economic slumps to avoid feedback loops and the spiral of decline.   As an aside I wonder, if Keynes came back and saw what his acolytes were saying in his name, if he could stop throwing up.  When he found new facts he changed his mind, and I suspect he might have changed his and strongly cautioned against turning a remedy into an addiction to support  habitual corruption and unsustainable privilege.  But I do not know if he was that honest of a intellect, or would have merely gone along with the rest for the benefits of his class.

Huge deficits over long periods of time to finance non-structural consumption and underwrite malinvestment and currency manipulation are almost invariably toxic.  The 'vendor financing' that gave rise to the age of 'Asian miracles' is the rope which will be used to hang the capitalist system unless strong measures are taken to clean up the corrupt system that grew up to support and profit from this economic Frankenstein.

The only reasonable course of action is for the West to nationalize its TBTF banks, dismantle them gracefully while keeping their depositors whole, and give up their dreams of global and domestic financial domination by adopting a system of real capitalism based on market pricing, price discovery, competition kept intact from monopoly through effective regulation and law enforcement, transparency and a climate of honesty.  But that would visit restraint, inconvenience, and even some pain on the powerful and privileged, those who have benefited greatly from this long charade, so it will be resisted to their bitter end.

While the stock and housing market bubbles have burst, the bond bubble, which includes the US dollar as a bond of zero duration, remains to be resolved and marked to market.

Source: Jeremy Grantham's 4Q 2011 Investment Letter

The Next Phase in the Currency Wars Among the US, China, Japan and Europe

"Double, double, toil and trouble;
Fire burn and cauldron bubble.
Cool it with a baboon's blood,
Then the charm is firm and good.

O well done! I commend your pains;
And every one shall share in the gains;
And now about the cauldron sing,
Live elves and fairies in a ring,
Enchanting all that you put in.

By the pricking of my thumbs,
Something wicked this way comes."

Wm. Shakespeare, Macbeth, Act 4, Sc. 1

"...The entire global system is at a critical juncture with sovereign bonds, currencies, stock markets and the fate of politicians all in play. The hidden purpose of QE and QE2 was always to cheapen the dollar by causing inflation in China and forcing its hand. Critics have said that QE did nothing to help with unemployment and consumption. But that was never the main purpose – the purpose was to weaken the dollar to help exports and get jobs that way, but it takes time.

I removed QE3 from my set of expectations late in 2010 when it became clear that Fed rollovers were enough to keep the yield curve tame and, more importantly, China was finally starting to move on the currency.

For now, QE3 is still off the table. But if the eurozone weakens and China weakens, that is the signal for more QE. It’s hard to know how this will play out, but at least we know what to look for. If you want to see QE3 ahead of the market, watch the euro.

Finally, it is not quite true there are no winners in a currency war. There is always one winner – gold."

Secrets of QE, Gold, and Currency Wars - Jim Rickards

J P Morgan Says "We Love Gold"

JPM loves gold, and recommends buying the miners to play it with gusto no less.

I know, it's kind of creepy at first blush, isn't it?  Do Bankers blush?   Do their algos dream of electronic sheep?

Curiouser and curiouser.

What's next, will Jonny Nads turn bullish on what his people have been selling for years, and many times over it appears? Perhaps that would be just too much, and contrarian indeed.

It must make that other craven crow, Jeffery boy, just flip his wig a hundredfold to hear such heresy from the princes of the metal bashing set.

Well, it could be a nicer look for Blythe.  Gold flatters the face, whereas silver makes one pale.

Perhaps it is just a distraction from silver, which their central bank cronies cannot lend to them, having little or none anymore. Or perhaps a central bank chum whispered some words of hidden wisdom into their ear.  I have heard faint whisperings as well.

"I have heard the mermaids singing, each to each...
I have seen them riding seaward on the waves
Combing the white hair of the waves blown back
When the wind blows the water white and black.
We have lingered in the chambers of the sea
By sea-girls wreathed with seaweed red and brown
Till human voices wake us, and we drown."

Well perhaps not so much human, as dismal voices, the mumblings from the bearded men of the financial demimonde.

Was that a bear hug they gave it today?  Or were they just clearing the decks for their own trades.  Hard to tell in all this excitement, who is zooming whom.

But what goes around apparently comes around, and this has been a long time coming. As the founder of their bank, James Pierpont Morgan himself, once said:

"Gold is money. Everything else is credit."

Mirabile dictu. Barbarous is Back.

WSJ
Gold: J.P. Morgan ‘Loves’ It Big Time
By Dave Kansas
August 4, 2011, 9:49 AM ET

As Old Yeller races higher, J.P. Morgan comes out today with a report banging the drum for the barbarous relic.

“We love gold,” J.P. Morgan says. They add: “Many investors may look at the gold price chart with disappointment and assert it’s too late for them to buy. We disagree.”

The bank says that Western governments need to either raise taxes or cut spending or both, and nobody in authority seems ready to take those kinds of tough decisions. As long as everyone’s punting, J.P. Morgan believes gold will keep rising.

J.P. Morgan also points out that South Korea’s central bank recently snapped up 25 tons of gold, joining Mexico, Russia and Thailand as big buyers of the yellow stuff.

In a twist, JPM says gold stocks, which have lagged the surge in gold prices, might be a good vehicle to get into the gold game. They like Goldcorp, Kinross, Newmont and Barrick.

US Debt Limit and Debt Versus Gold in US Dollars

Let's see, when might we expect the price of gold in dollars to stop going higher?

Chart from sharelynx, and a h/t to my brother Steve.

It would be interesting to see this correlated to Debt/GDP or Broad Money Supply/GDP, but this gets the point across.

This is your country on oxycontin. Get used to it. h/t Ilene.

ZeroHedge: Richard Russell Slams Robert Prechter, Praises Gold, Tells Readers Get Out Of Stocks.

First, Richard Russell does not 'slam' Prechter because he is a gentleman and doesn't really 'slam' anyone. Fights between pundits can be fun in a voyeuristic way, but they are largely unproductive and generally used as a means of gaining attention, and providing distraction from what really matters, in the manner of panem et circenses. And sometimes people use provocative headlines to garner interest as well, in the manner of the New York Post and Daily News.

What Russell is saying is that Prechter is wrong in his interpretation of how deflation will play out, and what the endgame will look like. And he is saying almost the same thing that others, including Eric Janszen and myself, have been saying for quite some time, but in a slightly different ways.

Second, what Bob Prechter does not realize is that a contraction in credit does not imply a one for one decrease in 'money' just as an increase in credit these days does not result in a one for one increase in money. That is because credit is not money, it is the potential for money. Why more people don't get that is beyond me. They trumpet the diminishing returns of money production for each marginal dollar of credit, but they don't admit that this credit is vaporous, and as it dissipates it does not reduce money supply one for one either.

Third, and probably most importantly of all, even as the credit contracts, and the money supply contracts at some lesser rate as show in the money supply figures, the 'basis of value' of the money is also contracting. Since the US dollar is not based on gold, we have to look at what is providing the basis of its value. And what are those things, and what is happening to THEIR value.

And finally, there is a huge overhang of eurodollars out there, that are largely parked in Treasuries mostly of a moderate duration of three to ten years. By buying the Three and Ten year notes the Fed is 'monetizing them' and taking that supply off the market, softening the blow when foreign entities first stop buying them, and then eventually start selling them.

We can't detect the selling yet in the Fed Custodial accounts. And we do not have a reliable reporting of eurodollars because that is the ONLY component of M3 that was discontinued by the Fed a few years back. The rest were maintained. When the Fed said they would no longer report M3 what they were really saying is that they would no longer provide a reliable report on eurodollars. The conspiracy guys may have been right, but they were focusing on the wrong item.

Bernanke and the Fed are going to be playing these markets to manage bonds and the dollar, and it is going to be a balancing act, and most likely a race to the bottom. That is why it is hard to predict. So far Ben is being predictable, doing what he said he would do, even if it is not always clear to everyone. But he has some other things in his bag of tricks, and those might be a little more complex.

What the Fed is doing by lowering the Ten year note by buying it in the market, in addition to picking up the slack from the overseas banks, is trying to trigger another round of refinancing in corporates and mortgages. It is estimated that two trillion in refi's will be triggered if the Fed can get the Ten year down below 2.5 and even approach 2 percent.

And this prolonged quantitative easing has a secondary effect that supports this. These low rates tend to drive investors from low yielding instruments in search of return, which implies a mix of greater duration and risk. More on this at some future date.

I think Elliot Waves are popular because they are not particularly rigorous or scientific, are easily learned, and are flexible enough to justify almost any outcome you wish to see. Their value is that they remind people that things do not go straight up or straight down. Since most charting is just a forecast it might be no better or worse than the others.

But what does discredit Prechter is that he is using an economic monetary model from 'the last crisis' that was valid when the dollar was on an external standard. And it is a pure fiat currency now. That is a huge difference, and the failure to account for that in your thinking is an elementary mistake.

AND even worse, he has been repeatedly wrong about gold for the past eight years and has never admitted or understood why, and merely keeps moving his price levels. Although to his credit he has been very right about Treasuries, and people should not forget that either. Treasuries have been in an epic bull market for quite some time, and like bull markets in stocks have created quite a few market geniuses out there.

Bob has his points for and against like everyone else. He has made some very good calls, and some horrible misses. People tend to remember the hits and forget the misses.

Does Bob ever admit it when he is wrong? He has never done so on gold. And I find stubbornness in the face of failure to predict, the unwillingness to admit error and adjust, to be just the kind of amateurish investing error that causes people to take their trading accounts over Niagara Falls. And I think this is what concerns Richard Russell, that if and when the tide changes and the dollar resumes its long decline lower, that Bob will not recognize or admit it, and will take quite a few trusting souls over the cliff with him.

No matter what happens with easing or not, the primary issue is that a relatively small financial elite has taken control of the US economy, and is using it for their personal power and wealth, and corrupted the natural market processes.

And this corruption is being transmitted to the rest of the world's economy creating bubbles and collapses in distant places because of the importance of the US economy and the dollar. Since the Bankers have control of the issuance of the world's reserve currency, they can bend the world to their will, and their willfulness is not beneficial to anyone except themselves. The world is seeing the continuation of the 'cold war' under different means and with different objectives, and with a different set of adversaries and alliances.

But what about Japan? There are easily twenty examples of monetary crises and economic collapses since WW II, and Japan is the one seized upon as THE example of what MUST happen in the US, despite the tremendous differences in position of the two countries economically, culturally, and demographically. Talk about conformational bias. I have spoken about this at length in the past. Japan demonstrates that monetary outcomes in a pure fiat regime are a policy decision. And Japan was homogenous enough, and small enough, to play in its own policy sandbox long enough to realize the outcome that was achieved. Until recently, Japan was essentially a 'one party' democracy imposed on them after the War by the US, ruled by the LDP and the big corporations, the keiretsu.

All things considered, the Russian outcome seem more likely to me, except the US is short on natural resources, so it is hard to forecast what will finally trigger the recovery. The dominant industry is financial fraud, demand that seems to be on the decline in US' trading partners, unholy alliances amongst central banks notwithstanding.

The US financial sector is still greatly oversized, and exacting a debilitating tax on the real economy. The markets are manipulated and rife with fraud, so productive capital formation and allocation is short circuited by short term speculation at almost every turn. There will be no recovery unless the system can be brought back to a pre-bubble state. And the system will not cure itself by deprivation or a false austerity, dishing out more punishment to the victims. This will provoke a destructive reaction, not what anyone would call a cure.

That is the real issue. Everything else to me is a sideshow, gossip, distraction, and noise.

You can read the original article Richard Russell Slams Robert Prechter, Praises Gold, Tells Readers To Get Out Of Stocks.

Jim Rickards on King World News

Jim Rickards Interview on King World News - click here to listen.

1. Financial Warfare - protectionism, excess savings, managing exchange rates.
2. Beijing consensus: neo-mercantilism can lead to outright financial warfare
3. Bernanke worried about deflation more than anything else
4. Money printing in US and Euro is inflationary and balances China deflationary forces
5. Gold does well in both inflation and deflation - well suited to times of uncertainty
6. Pullback in gold due to liquidation to raise cash in current crunch
7. Gold sellers are daytraders, speculators, but buyers look like strong hands
8. His Price target on gold to $2,000 short term and $5,000 intermediate term
9. Merkel ban on naked short selling was absolutely right - stand up to Wall Street
10. The way CDS are being used they are not part of a free market, but a rigged game
11. Greece, Spain, and Italy are important NATO allies - we are allowing our own US investment banks to assault them financially (economic hitmen)
12. Speculation is fine, but it must be transparent, well funded, and regulated
13. No money down, shadow CDS market is completely destructive
14. Who are the Bullion Banks serving? Who are the longs and the shorts?
15. JamesGRickards is posting on twitter.com

There is a very important thought buried in the observation that Chinese deflationary forces and slack demand are deflationary, but being countered by money printing which is inflationary. That is a prescription for stagflation.

I thought he was rather easy on the Chinese who are egregiously manipulating their currency exchange rate to their advantage vis-à-vis the developed industrial nations of Europe and North America.

Bullion Denominated in Euros, Pounds and Swiss Francs At New Record Highs as the IMF Prepares for a Currency Crisis

What many traders are starting to realize is that the precious metals plunged with stocks in the recent market dislocation in 2008 because it was a 'liquidity crisis' among private institutions triggered by the credit unworthiness of individuals that provoked a general selling of assets.

What we are experiencing now is a sovereign debt (credit worthiness) crisis, which is really a currency crisis. A fiat currency is backed by nothing except the 'full faith and credit' of the issuer. It is not that it would have to be 'different this time' as some would think. It's not even the same thing, a different type of a crisis entirely.

The markets are assessing the risks of various currencies and countries with regard to default. Gold, and to some lesser extent silver bullion, are wealth that is sufficient to itself, requiring no backing from any particular country. Quite the opposite, there are large short positions and highly leveraged paper commitments, that present significant counterparty risk to the upside, because it is unlikely to be deliverable at anything near current prices.

Regulators have long turned a blind eye to what some contend are officially sanctioned shenanigans and secretive leasing and selling. This is becoming increasingly difficult for the central banks to manage, and we may approach a breaking point unless the financial engineers and politicians can head it off once again. They have a strong vested interest in hiding their past dealings, as we saw in the case of Mr. Gordon Brown in the UK.

If there is a new panic selloff, all assets will again be liquidated in the short term, including the metals. But their rebound may be quite sharp and potentially rewarding if the sovereign debt crisis continues, since the search for safe havens will be even more aggressive, as the seats in the shelters are quickly taken.

This is why the IMF is meeting in Zurich on May 11, ahead of the formal discussions scheduled later this year to discuss the reweighting of the SDR. There is a currency crisis on the horizon, and it may involve not only the PIIGS, but the larger developing countries including the US and the UK. And they are preparing contingency plans, and seeking to head it off.

I do not necessarily view this as gold and silver positive, because when central bankers get together to work their schemes on the markets, valuations may not be based on any fundamentals. The financial engineering of the central banks has been largely deleterious to individual wealth among the public, and there may be some shocking disclosures of market manipulation yet to be heard. The central bankers may be as compromised and hypocritical as their corporate cousins.

But if 'the fix is in' and the wealthy have indeed been buying bullion ahead of the public, then we might see something happen later this, and it could be quite impressive. The amount of 'book talking' being done on behalf of large institutions by paid analysts approaches the level of the appalling, even for such a recently tarnished profession.

By the way, the 'tease' today is that Jimmy Rogers is said to have turned rather bearish on stocks, and says he is getting quite short on one of the big western financial institutions which everyone believes is solid and well founded. He thinks it may soon become involved in the financial crisis. He would not reveal the name. We have a poll running until 9 PM Eastern US time for you to take your best guesses. No I did not include the US Treasury in the list.

As for the theory that currencies gain in strength if there are debt defaults, this is only if the taxation and production levels remain relatively constant or higher, and the debt destruction is within the debt which is owed by private parties. When sovereign wealth is destroyed this is a de facto default, and potentially corrosive as acid to a currency's value.

"Bullion denominated in euros and Swiss francs surged to new record highs this morning. The euro has again come under severe pressure as contagion risks increase. While all the focus is on Europe right now, similar risks face the UK and US economies and this is leading to significant safe haven demand for gold internationally. Prices have risen close to a new nominal record against the British pound and the highest level in yen since February 1983. Gold is slightly higher in most currencies this morning and significantly stronger in British pounds and euros - trading at $1,185.00, £786.03 and €925.72 per ounce this morning. Markets await the ECB rate decision and UK general election with interest."

Sovereign Debt Demands

"This is why the International Monetary Fund (IMF) and the Swiss National Bank (SNB) are jointly hosting a High-Level Conference on the International Monetary System in Zurich on May 11, 2010. The conference is set to analyse the global financial crisis and will provide an opportunity to exchange ideas on a number of related topics, including sources of instability in the international monetary system, improving the supply of reserve assets, dealing with volatile capital flows, and possible alternatives to countries’ accumulation of reserves as self-insurance against future crises.

The conference will bring together a group of high-level participants, including central bank governors, other senior policymakers, leading academics, and commentators. The key objective of the conference is to examine weaknesses in the current international monetary system, and identify reforms that might be desirable over the medium to long run to build a more robust and stable world economy. The event will be concluded with a joint press conference by SNB Governor Philipp Hildebrand and IMF Managing Director Dominique Strauss-Kahn.

There is speculation that the conference may have favourable implications for gold with proposals that gold reserves may again have some form of role in bringing stability to the international monetary system."

Metal Commentary by GoldCore

Jim Rogers: More Turmoil Ahead in Global Financial Markets

Clusterstock: Jim Rogers Is Now Shorting A Major Western Financial Firm That Everyone Thinks Is Sound

As for my kitchen, we are plating financials short and bullion long all this week. But this may not be on the menu into the Friday US nonfarm payrolls, at least not in the same combinations and prices.

93% Of Commodity Specs Believe that Gold Price Will Decline; US Financial Model Is a Threatened Specie

Of course that pun in the title is intended. How could you even ask?

Mom and Pop America, unlike their Asian counterparts, and most speculators apparently, do not favor the precious metals like gold.

They might be right. But sometimes it is safest to be positioned comfortably far from the maddening (pun intended as in 'frenzied' and 'annoying') crowd.

For me that entails being on a short term hedged trade, long stuff and short fluff.

The US financial sector, as represented by the bloated banks, are overvalued based on a business model that relies on gaming the system, routinely defrauding their customers, adding little value to the global economy except for themselves, and feeding off the wealth creation and the labor of the many. That seems to be coming to an end, perhaps not tomorrow, but as time goes by.

If stocks take a serious tumble in the US we'll know which way the wind is blowing. If gold holds its ground, we will have an indication that it is ready for the next leg up, because the drop in stocks is based on a disgorgement of assets which have lost their appeal and confidence because of the repeated, increasingly reckless, and virulent frauds of the American oligarchs.

Commodity Online
Poll: 93% of Investors Believe That Gold will Fall
By Rutam Vora
21 April 2010, 10:49 a.m. EST

(Commodity Online) -- At a time when gold prices reeled under pressure, for a sustained period after hitting their all-time high in December 2009, the perception towards the yellow metal seems to have reversed with investors hinting at weakening of gold prices in the near future and strengthening of other investment avenues...

In an online opinion poll conducted by Commodity Online, a majority of the respondents have hinted at a possible fall in gold prices in the near future, and better earning opportunities will come knocking on the door.

In an online poll of a sample size of 21,600 respondents selected from across the globe, 93% or 20,100 of the total sample size had opined that there would be a fall in gold prices due to a recent upbeat mood in the global equity markets, while only 1,400 respondents contradicted the stand, 0.46% did not comment on either side. This showed that most of the respondents believed that there would be a fall in gold prices in the near future due to a recovery in global equity markets.

However, with regard to the other metals being an investment destination, most of the respondents maintained a view that they (base metals) can potentially become alternative investment instruments. As many as 64.35% of respondents considered base metals as a potential investment instrument but of them, 53% still chose gold as a preferred investment instrument compared to base metals, while 46.76% preferred base metals to gold....

Similarly, of the total respondents as many as 53.1% believed that the US dollar would replace gold from its status of 'safe haven.' Looking at the recovery of the US economy from the nightmarish recession which had started from the US and hit the world economy in 2008, the dollar was found gathering steam once again. However, 46.8% of the respondents contradicted the view and maintained their skepticism towards the dollar and put gold to their preferred investment mode...

SP and Nasdaq 100 Futures

Here is where the equity markets stand.

Remember that tomorrow is options expiry for February.

As an aside, the bear raid on gold that occurred in conjunction with a non-announcement from the IMF about their previously announced gold sale did not stick, with prices snapping back today to the paint at which the raid hit, first the miners, and then the metals, largely in the thin after hours trade.

Next week is an option expiry in the metals futures markets, and the US is planning on auctioning an enormous amount of Treasuries, so we would not be complacement at this point.

Still, it was gratifying to see that Dennis Gartman bought back the gold position he sold before the rally. He sold at the bottom, let's see if he can do better and not jinx us for a short term top.

SP 500 Futures Daily Chart

The VIX (volatility index) fell to 20.39 today which is near the lows for the year, signaling a complacency in the US equity markets, although the bulls would call it 'the new norm' which is a euphemism for 'all is well again.'

Today the market drifted upwards in light volumes as the risk trade was sold (treasuries, precious metals) although stocks struggled to hold their early gains, and remained in the big rangebound trade from early November.

This is a holiday shortened week, subject to portfolio adjustments and some profit taking, which causes cross currents, but often with an upward bias as the tape gets painted into the year end and the Other People's Money crowd take their bonuses.

We are playing these markets now by holding lightly hedged longs (about 1/6 position) in the metals and miners which we picked up around 1120 gold on average, after the 'sell signal' which we issued here at 1215.

Now we stand pat on all investments and wait for something to break out one way or the other. The dollar is reaching the technical levels we are looking for on a bounce, and now we will see what it is made of.

Markets are being shoved around by the big traders. Do not overtrade in response.

Comex Acts to Curb Speculation (in Gold)

Did J. P. Morgan send up a flare as their short positions were taking on water and listing?

"As a heads up, Gold often gets hit with a bear raid on FOMC day. Since the
miners were hit a bit today with possible front-running that might be a good
bet. Who can say in these thin markets?"
Is the US Financial Crisis Over? 1:49 PM

And After the Bell...

"The COMEX gold margin requirement is going up overnight. New levels are $5403 initial per contract (the old one was $4500), and $4002 maintenance."

Change you can believe in. Vox pecuniae and all that. LOL Why raise the margin requirments now after a ten percent correction?

The bullion banks (the bears) are edgy because the buying has been particularly robust in the physical metal at this price level, especially the further one gets from New York. Open interest in the futures has been remarkably resilient, showing very little long liquidation. A failure of the commercials is never a pretty sight.

Let's see if the Wall Street Banks can hold their ground and keep shorting into the demand from overseas.

The Tide of History and The Spirit of Human Resilience

Why do so many people continue to turn their noses up at an investment with returns like those listed below? And not only that, why do small groups continue to aggressively attack the very notion that it is genuine, a real trend, a development with appeal across many nations and people, a sustained market trend that is telling us something?

Returns, I might add, that are supported by very strong fundamentals of supply and demand. Coming off a twenty year bear market in which supply was diminished, and burdened by years of central bank selling that seemed to be non-profitseeking and bureaucratically determined to crush any rallies, the market turned off the bottom in 2001 and has barely looked back since except for brief corrections.

"Since the start of the decade gold has been in a strong secular bull market in which it has had only one negative year (2001) while the S&P 500 has had four. Gold’s strong performance has produced a cumulative return of 311.54% for an annualized return of 15.18% per annum this decade. In stark contrast, the S&P 500 has been in a secular bear market in which its cumulative return has been a negative 24.52% for a negative 2.77% annualized return. While gold has had periods of volatility (risk), what the above numbers indicate is that gold has had a superior investment profile relative to the stock market.." Chris Puplava, Gold and Newton's First Law of Motion

Central banks are now net buyers in the aggregate for the first time in many, many years. This is a significant change since they were a major source of marginal supply. The post Bretton Woods dollar regime created by Nixon in 1971 is shaking hard, trembling the foundations of a world currency system based on financial engineering, empire, and oil.

When the unthinking mob starts buying, and gold and silver are no longer considered eccentric but essential, and local shops and banks start buying and selling the metal, then it will be the time to sell. But probably not before.

This is a phenomenon, a generational occurrence. Personally, it is fascinating, and worth having retired early to see it unfolding day by day.

I have analyzed this market trend repeatedly over time, from many different dimensions, and have listened to every argument, pro and con. It holds water, it makes sense, adds up; it seems grounded in free market principles, historical trends, the invisible hand of the market. It is a keystone of Austrian economics.

And unless it is otherwise impeded, it will most likely continue for some time, until the financial engineering of bubble-nomics subsides, and returns on paper become 'real' again. When the world of fiat currency and finance becomes less arbitrary and more predictable, more stable and just. More rational and some might say, conventional.

The rally in precious metals sparks fear and envy in many; it makes them genuinely angry and emotional, even otherwise intelligent and rational people. And one must surely ask, "Why?"

I remember vividly a warm spring day in Red Square in 1996, watching a small group of the old guard, long time Communists, demonstrating against Yeltsin and the reforms of Gorbachev. They did not like the changes, and railed against them, dressed in their shabby clothes with their once mighty banners, now drooping.

Their savings in roubles were decimated, and the worst devaluation was yet to come with the debt crisis of 1998. The once mighty Soviet republic was in disarray. They clearly did not like it, violently opposed it, denied it, while yearning for the past. There was no one in the queue at Lenin's tomb, and even though it was absolutely deserted in the middle of the day, the young soldier on guard yelled reflexively at us to "hurry, move along" in an almost surreal way. He did not know what else to do.

And no one cared, except for a few curious onlookers like our small group. No one noticed. They were being made extinct by change which they would not, could not, accept because it conflicted with their view of how the world had been and how it should continue to be. They held to their familiar, conventional wisdom, and became out of synch with the times, an oddity, almost atavistic.

There were vibrant business opportunities although the risks were high. Shortages and 'criminal gangs ' were in the ascendancy, to a notorious degree, but the surface was peaceful overall. Life goes on, always. I had long conversations with many entrepreneurs, including those who were acting to solve the problems that were plaguing many Western corporations, who were in business to make things work, to find opportunity in the change, who were trying to make their way. One door closes, but another door opens. We made a good business of it, and some friends who are remembered fondly to this day.

The discussions we had about value were grounded in practicalities but were profoundly philosophical, as is so common among the long-suffering. Such is the character of the Russian people. I loved the land and the culture with a natural affinity that was almost surprising. But on the whole, people are the same everywhere, but with their own particular attractions and character which makes them uniquely interesting. The spirit permeates the world.

The tide of history rolls in, and does not conduct focus groups, or popularity polls, or regard the consensus of the crowd. The smart money tests it, and then moves early with it, or at least does not fight it. The only traces of the trend are what the few are doing and where their money is flowing. The tide moves slowly, inexorably, but is there for any and all to see if they would just look past their preconceptions, their ideologies, the fog of government, and their desire for what once was, but can no longer be.

At this point in history, gold is a harbinger of change. People of the status quo fear change and change agents, always. And despite their best efforts to stop it, to discredit the messenger, obliterate its effects, to silence the message, the tide of history comes and washes over them, and the landscape is changed. And the familiar is a thing of the past.

We live in remarkable times. If you do not like to hear about change, if it upsets you, then do not read this blog, and stick to the mainstream media. Documenting and analyzing and surviving change in the financial sphere is what this is all about. No matter where reason and the data may lead, no matter what icons may fall, après déluge.

This is history.

Live it, and not the myth.

Gold Is Rallying Because....

Gold is a superior store of value.

It resists the attempts by the monetary authorities to debase it, because except for concerted attempts to suppress its price through non-profitseeking selling at key market points by central banks, and naked short selling by the global commercial banks in the paper markets, gold cannot be created and controlled by financial engineers like Ben Bernanke.

It provides a refuge, a store of wealth for private citizens during a period of general currency risk.

A simple chart should suffice.



As part of the quantitative easing regime, the Fed has so debased the financial system that dollar debt is paying negative interest rates once again as it did in the 1970's.

In other words, it is costing money to hold dollar financial assets because of the mispricing of risk being engineering by the G7 central banks.

So, people and some central banks are seeking refuge in a stable store of wealth that is beyond the control of the financial engineers.

"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." Fredrich August von Hayek

"The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments." Ludwig von Mises

Alan Greenspan himself states the case most eloquently in his famous essay from 1966 Gold and Economic Freedom.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

When the currencies of the US and Europe are debased by the financial engineers for the sake of the banks, when spendthrift governments run enormous deficits to fill the pockets of their special interests, informed wealth seeks a refuge in places where it cannot be so easily consumed for the exclusive benefit of the political elite.

This is sadly the case today, especially within the Anglo-American sphere of influence, from which the dollar had become the new opium trade, viciously addictive and debilitating. And so we have seen an historic flight to safety that began in the developing world, but is gaining momentum as the global dollar regime falters.

If you hold dollars, the Fed and the Treasury can confiscate your wealth, virtually at will. That is real power.

When the Fed lifts interest rates to again provide a positive return against inflation, then gold may stop rallying and reach a stable equilibrium price. This will be more difficult to do than it was to debase, as it is always easier to destroy than to create.

And it may be difficult to determine when that time comes, because the US bureaucrats have so thoroughly altered the Consumer Price Index over the past ten years that it is no longer a fair measure of inflation. Therefore it is a challenge to determine what is real and what is not, what is priced fairly and what is not. This is the hallmark of the modern western bankers and their accountants, and their demimonde in politics and the media.

Still, the message of the market is quite clear, to anyone who will listen.

A pleasant Thanksgiving holiday to my American friends, and a reminder to the rest of the world that you must muddle through without the direction of Wall Street for the next few days. How fitting that Thanksgiving was declared a national holiday by Lincoln in the depths of the Civil War, and made official by the Congress in 1941, at the end of the Great Depression, on the cusp of a terrible world war.

And Lloyd, I would not join the many and be happy at all if you took your own life as you have recently confessed that you feared they would. But there might be a cause for celebration if a master of the universe such as yourself would simply take this timeless message into you heart, and make it the light of the rest of your life. That is the right pricing of risk, the proper valuation of all that you are.

"Come, let us sing to the Lord; let us make a joyful noise to the rock of our salvation. Let us come before His presence with thanksgiving; let us make a joyful noise to Him with songs of praise. For the Lord is a great God, and a great King above all. In His hand are the deep places of the earth, the heights and strength of the hills. The sea is His, for He made it, and His hands formed the dry land. Come, let us worship respectfully, let us kneel before the Lord our Maker. For He is our God and we are the people of His pasture and the sheep of His hand. Now, if you will but hear His voice." Psalm 95

No time for despair, now is the time to be surprised by joy.

"I do not think of all the misery, but of the glory that remains. Go outside into the fields, nature and the sun, go out and seek happiness in yourself and in God. Think of the beauty that again and again discharges itself within and without you, and be happy." Anne Frank

Willem Buiter Apparently Does Not LIke Gold, and Why Remains a Mystery

Dr. Willem Buiter of the London School of Economics, and advisor to the Bank of England, has written a somewhat astonishing broadsheet attacking of all things, gold.

I have enjoyed his writing in the past. And although he does tend to cultivate and relish the aura of eccentric maverick, it is generally appealing, and his writing has been pertinent and reasoned, if unconventional. That is what makes this latest piece so unusual. It is a diatribe, more emotional than factual, with gaping holes in theoretical underpinnings and historical example.

I suspect that commodities such as oil and gold are giving many western economists with official ties to government monetary committees a stomach ache these days. Perhaps this is just another manifestation of statists and financial engineers facing the music, as illustrated by the second piece of news from Mr. Buiter on the US dollar, from earlier this year.

Here are relevant excerpts from his essay, with my own reactions in italics.

Financial Times
Gold - a six thousand year-old bubble
By Willem Buiter
November 8, 2009 6:02pm

"Gold is unlike any other commodity. It is costly to extract from the earth and to refine to a reasonable degree of purity. It is costly to store."

This is inherent to its rarity. It is desirable because it is scarce and useful, and this requires greater protection against theft or accident. Euro notes are far more costly to store than the paper and ink which is used to make them, at least for now.

"It has no remaining uses as a producer good - equivalent or superior alternatives exist for all its industrial uses."

This is an absolute howler to anyone who cares to look into industrial metallurgy. Gold is one of the most malleable and ductile of metals, with excellent conductive properties, slightly less than silver and copper, but is remarkably resistant to oxidation; that is, it does not tarnish. It is widely used in electronic and medical applications for example. What limits its use is that it is scarce, it is expensive, and that there are other competing uses, not that superior solutions have been discovered based on their fundamental merits.

"It may have some value as a consumer good - somewhat surprisingly people like to attach it to their earlobes or nostrils or to hang it around their necks. I have always considered it a rather vulgar metal, made for the Saturday Night Fever crowd, all shiny and in-your-face, as opposed to the much classier silver, but de gustibus…"

Silver is indeed an attractive metal, and had been used for jewelry and coinage throughout history for its unique characteristics. Silver was the metal of the common man, and gold was the metal of kings because of its greater beauty and scarcity.

The garishness and lower class status of gold is of course reflected throughout history, in the funereal artifacts of the Pharoahs, the Ark of the Covenant, the mask of Agamemnon and the adornments of Helen of Troy, the exquisite beauty of the Emperors of China, and the treasure of the Aztecs. Perhaps Willem is merely used to the cheap 'bling' being sold in market stalls, and should occasionally shop on High Street for better goods.

"Because to a reasonable first approximation gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity. You will be familiar with fiat currency. Unlike what Wikipedia says on the subject, the essence of fiat money is not that it is money declared by a government to be legal tender.

It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.

The “let it be done” literal meaning of the Latin ‘fiat’ should be taken in the third sense given by the Online Dictionary: 1. official sanction; authoritative permission; 2. an arbitrary order or decree; 3. Chiefly literary any command, decision, or act of will that brings something about."

This is where Willem's tortured reasoning reaches a crescendo of nonsense. Firstly, we have already shown that gold has many industrial and decorative uses contrary to his misstatements, and has been valued throughout recorded history in its own right in diverse societies and cultures.

By his definition anything that is priced by the market is fiat. It is a broadening of the definition so as to make it completely useless, or a narrowing of the definition to a few 'essentials' by some unstated arbitrary measure so again to make it useless.

The definition of fiat with regard to an instrument of the state is perfectly well known, despite his attempt to distort it. The ruling authority makes a decree, and so let it be done based on that power. Willem seems to confuse a fiat currency with barter, or some traditional custom of value. What is customary is not 'fiat' but a popular convention ordinarily for fundamental reasons.

If a valuation is highly peculiar to a region and time it might be an eccentricity, like tulipmania or ladies fashions. But calling a mania a "fiat" degrades the language in an Orwellian manner, because one comes from the people and is popular, and the other from the authorities and is often embodied in the laws.

If something has universality, the likelihood is that it is well-founded on an essential reasonableness, satisfying some basic need and utility. People desire a store of value that is stable and reliable everywhere and anytime, and not subject to the vagaries of the local ruling elite. And the judgement of the history is that nothing fulfills that desire better than gold, or gold in combination with silver.

If a price is established by law without regard to the market, it is 'fiat.' That is the difference between a decision of the marketplace and a regulation from a ruling authority. No wonder English banking is in such a mess, if this is their conception of valuation. They can no longer see any substantial difference between the will of the people and the diktat of the state.

The best way to explain this perhaps is by example. Let us imagine that tomorrow young Tim of the US Treasury announces that the US government will no accept Federal Reserve notes in payment of legal debts, public or private, and that further the US was issuing a new currency called the amero for which Federal Reserve notes would be redeemed at 100 to 1, that is 100 FRNs for one amero.

What would the market price of Federal Reserve Notes around the world do in response to this? Is this outlandish? No it is remarkably common in the history of paper currencies. I witnessed this personally while in Moscow during the collapse of the Russian rouble in the 1990s, and it made a distinct impression.

And what if young Tim decreed tomorrow that the US would no longer accept gold for taxes or provide as payment for its debts? Oops, too late. Nixon did that in 1971. And gold is now at $1,100 per ounce versus about $45 then.

A fiat currency is an instrument of debt, a bond of zero maturity, an IOU. It has a counterparty risk, and is not sufficient in itself.

That, Willem, is what is meant by fiat, the contingency of value upon some official source. If it were possible let Willem and I go back in time to ancient China, or even Victorian England, he with his pockets filled with euros, and mine with Austrian gold philharmonics, and we will see whose definition of value stands the better.

Governments can effect the price of any commodity negatively, by force of law, but its value is not contingent on government backing per se, except in instance of subsidy, but based on the utilitarian decision of the marketplace. Governments do not force people to buy gold, except indirectly through reckless management of the national economy. They do often compel a people to perform their economic transactions in the official currency however, so that it may be taxed, directly by percent, or indirectly through inflation.

Or as George Bernard Shaw put the proposition, "You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold."

I don’t want to argue with a 6000-year old bubble. It may well be good for another 6000 years. Its value may go from $1,100 per fine ounce to $1,500 or $5,000 for all I know. But I would not invest more than a sliver of my wealth into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.

It is fortunate indeed that Willem does not wish to argue this point, because his proposition on this score smacks of mere petulance. In the words of financier Bernard Baruch, "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." And he is right, unless you are looking at history with very selective contortions.

There are also historical benchmarks for the value of gold, that being one ounce of gold for a man's suit of fine clothing that holds remarkably well. How then could anyone say that gold is in 'a six thousand year bubble?'

But why such an odd, almost hysterical essay now, with such an outlandish title unsupported by any data?

It is probably simply the rankling irritation that all statists and financial engineers feel when confronted by something that resists their control and manipulation. Or it may be related to some unfortunate decisions made by the Bank of England, or the Bundesbank, to enter into trades with the people's gold on the well-intentioned advice of their economists, a decision which is now coming back to haunt them, causing them to peer into an abyss of public anger.

Who can say. But there is a time of uncertainly in stores of wealth and currency coming. Below is a news article from earlier this year about a European economist named Buiter, who is predicting that the US dollar will collapse. That is because the US dollar is contingent on the actions of the Obama Administration, the Congress, and the Federal Reserve.

And gold is not, unless the US begins to emulate Herr Hitler. "Gold is not necessary. I have no interest in gold. We will build a solid state, without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That's the bastion of money."

And Willem, if you do not understand that, the principle of the contingency of fiat money, you understand nothing of economics. But I think you do understand it. Perhaps you are merely grumpy and out of sorts today, having eaten a bad sausage, with a case of dyspepsia. It does happen, off days and intemperate remarks, but not to eminent Financial Times columnists and distinguished professors when they wish to be heard on important matters.

It seems as though Mr. Buiter just doesn't like what gold is doing right now, rising in price, and the real story may lie in why he and the brotherhood of western central bankers are so concerned about it.

"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 U.S. Fed was very active in getting the gold price down. So was the U.K." Eddie George, Governor Bank of England, in a conversation with CEO of Lonmin, September 1999

Financial Times
Willem Buiter warns of massive dollar collapse
By Edmund Conway
5:34PM GMT 05 Jan 2009

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

"...Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. (I think it is related to a subsidy, a kind of droit de seigneur, granted to the dollar by the central banks as their reserve currency in lieu of a gold standard. And that is the regime that is collapsing with the overhang characteristic of a Ponzi scheme. - Jesse) However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise..."

How Can You Tell When Gold Is In a Bubble?

When the junior miners start showing these kinds of returns, you might be in a bubble.

We're nowhere near that point yet.

Reserve Bank of India Buys 200 Tonnes of the IMF's Gold

An apertif for the Indian central bank, and barely a nibble for dollar heavy China.

"You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold." George Bernard Shaw

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RBI to buy 200 tonnes of IMF gold
By Tamal Bandyopadhyay and Anup Roy
Mon, Nov 2 2009. 11:15 PM IST

Decision to strengthen its gold reserves follows similar moves by central banks of some other countries.

Mumbai: The Reserve Bank of India, or RBI, is buying 200 tonnes of gold from the International Monetary Fund (IMF), nearly half of what the fund plans to sell.

In 1991, when India faced its worst ever balance of payment crisis, the country had to pledge 67 tonnes of gold to Union Bank of Switzerland and Bank of England to raise $605 million (Rs2,843.5 crore today) to shore up its dwindling foreign exchange reserves, which were then barely enough to buy two weeks of imports. India’s foreign exchange reserves were at $1.2 billion in January 1991 and by June, they were depleted by half. Currently, the Indian central bank’s foreign exchange reserves stand at $285.5 billion.

RBI’s decision to shore up its gold reserves needs to be seen in the context of other central banks across the globe increasing their gold reserves. Among them are the central banks of China, Russia and a few countries in the European Union. (also known as 'the barbarians' - Jesse)

In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.

Compared with this, India’s central bank did not add anything to its gold reserves in the last one year, according to Bloomberg data.

In fact, the share of gold in India’s total reserves has dwindled over the decade.

In March 1994, the share of gold in the total reserves of the country was 20.86%; by the end of June 2009, gold constituted only 3.7% of the total reserves.

An IMF spokesperson in India declined to comment on this development.

RBI’s foreign currency assets consist mainly of sovereign bonds, mainly US treasurys. So, buying more gold will help the Indian central bank diversify its assets.

“Gold as a proportion of our reserves is relatively small,” said R.H. Patil, chairman of National Securities Depository Ltd and Clearing Corp. of India Ltd.

“Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings,” Patil said.

RBI’s foreign exchange reserves consist of foreign currency assets, gold, special drawing rights (SDR)—an international reserve currency floated by IMF—and RBI funds kept with IMF.

Out of RBI’s $285.5 billion foreign exchange reserves, foreign currency assets account for the most—$268.3 billion—followed by gold ($10.3 billion), SDR ($5,267 million) and reserve position in the IMF ($1,589 million).

According to RBI’s latest annual report, the foreign currency assets consisting of foreign securities declined by Rs81,010.25 crore from Rs12.98 trillion on 30 June 2008 to Rs12.17 trillion on 30 June 2009 mainly due to net sales of dollars in the domestic foreign exchange market.

At the current market value of $1,054 an ounce, or per 28.5g, RBI would need to spend about $7.4 billion to buy 200 tonnes of gold. With this, its gold reserve will rise to $17.716 billion, or roughly 6.20% of the total reserves.

IMF in September had announced that it wanted to sell 403 tonnes of its gold reserves, or one-eighth of its total holdings, to boost its finances on a long-term basis and to generate money to raise lending to needy nations. Under the concessional lending facility, IMF will lend at zero interest through end-2011 for all low-income members to help them tackle the impact of the financial crisis that rocked the world in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc.

A committee set up by a group of central banks overseeing the gold sales by the IMF has allowed the fund to sell 400 tonnes of its gold annually and 2,000 tonnes in total during the five years starting 27 September.

According to a report by the Associated Press dated 20 September, India, along with China and Russia, had evinced interest in buying IMF-held gold.

At a total holding of 103.4 million ounces, or 3,217 tonnes, IMF is the third largest official holder of gold after the US and Germany.

IMF’s total holding at historical price is valued at about $9.2 billion on its balance sheet. At market prices, as of 28 August, the fund’s total gold holdings were worth $98.8 billion.

Nine More Banks Fail with CIT a Packaged Bankruptcy While Gold Shines in a Jobless Recovery

There was tension-driven selling in the markets today despite the 'good news' in the headline economic numbers. The markets are on edge ahead of the ADP and BLS jobs numbers next week. The much touted theory of a 'jobless recovery' is started to show some big holes in credibility, as well it should.

Jobless Recovery

A jobless recovery is nothing more than a euphemism for a monetary asset bubble presenting an ongoing systemic moral hazard.

Yes, jobs growth lags GDP in the early stages, everyone knows this. A second year econ student might cite Okun's Law, although it is better called Okun's observation, to show that lag, but it is not relevant to this topic. Beyond early stage lags in the typical postwar recession, a business cycle contraction, what is meant by the jobless recovery is the post tech bubble recovery of 2001-5 wherein jobs growth lagged economic growth in a way we have not seen after any postwar recession, with the median wage never recovering. "Jobless recovery" is a relatively recent phenomenon in the economic lexicon, much younger than 'stagflation' which was thought highly unlikely if not impossible by economists based on their theories, until it happened.

It was the housing bubble and an explosion in unproductive financial activity crafted by the Fed and the Wall Street banks that provided the appearance of economic vitality in 2001-7. It was no genuine recovery despite the nominal GDP growth. It indicates a need to deflate the growth numbers more intelligently, if not more honestly, and future economists are likely to 'discover' this, although John Williams of Shadowstats has done a good job of demonstrating the distortions that have crept into US economic statistics. The tech bubble was perhaps an unfortunate response to the Asian currency crisis and fears of Y2K. What was done to promote recovery from the tech collapse and create the housing and derivatives credit bubble was pre-meditated and criminal.

The current state of economics is most remarkable for its arrogant complacency in the face of two failed bubbles, a near systemic failure, a pseudo-scientific perversion of mathematics exposed, and an incredible capacity for spin and self-delusion. The people wish to believe, and Wall Street and the government economists are all too willing to tell them whatever they wish to hear, for a variety of motives. And there is an army of salesmen and lobbyists and econo-whores touting this fraud around the clock.



The Failure of Financial Engineering

The next bubble should provide the coup de grâce when it fails, although the fraudsters might try and spin ten years of a stagflationary economy as 'the new normal.'

There are good reasons for this failure of American "monetary capitalism," and it has to do with an oversized financial sector and a surplus of white collar crime that both distort and drain the productive economy. The current approach is to pump money into a failed system without attempting to reform it, to fix its fundamental flaws, to make an honest accounting of the results. The result are serial bubbles and the foundation for long duration zombie economy with a grinding stagflation that may morph into a currency crisis and the fall and reissuance of the dollar, as we saw with the Russian rouble. It will stretch the political fabric of the US to the breaking point. This is how oligarchies and their empires fall.

CIT Staggers Into Bankruptcy

Trader confidence was shaken by more indications that business lender CIT will declare a preplanned bankruptcy next week.

Approaching Crash in Commercial Real Estate

Also roiling the markets was a shocking warning by billionaire Wilbur Ross of an approaching meltdown in the Commercial Real Estate market which has been anticipated and warned about by non-shill market analysts.

Gold Holds Steady

Gold showed a remarkable resilience today against determined short selling in the paper Comex markets. Here is a decent summary of the case that the gold bulls have been making, in addition to the standard observations about dollar weakness. Gold Bullion Market Reaching the Breaking Point

Bank Failures Hit 115

Meanwhile, nine more commercial banks rolled over this week. Calculated Risk reports that the unofficial FDIC list of problem US banks now numbers 500.

Here is the list from FDIC of all Official US Bank Failures since 2000.

All of the nine banks were taken over by the US Bank National Association (US Bancorp), and were part of the FBOP company in Oak Park, Illinois, one of the largest privately held bank holding companies in the US. It is reported that all nine were heavily invested in real estate lending.

California National is the fourth largest bank failure this year. It lost about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, in addition to overwhelming losses in California real estate.

North Houston Bank, Houston, TX, with approximately $326.2 million in assets and approximately $308.0 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Madisonville State Bank, Madisonville, TX, with approximately $256.7 million in assets and approximately $225.2 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Citizens National Bank, Teague, TX, with approximately $118.2 million in assets and approximately $97.7 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Park National Bank, Chicago, IL, with approximately $4.7 billion in assets and approximately $3.7 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Pacific National Bank, San Francisco, CA, with approximately $2.3 billion in assets and approximately $1.8 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

California National Bank, Los Angeles, CA, with approximately $7.8 billion in assets and approximately $6.2 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

San Diego National Bank, San Diego, CA, with approximately $3.6 billion in assets and approximately $2.9 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Community Bank of Lemont, Lemont, IL, with approximately $81.8 million in assets and approximately $81.2 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Bank USA, National Association, Phoenix, AZ, with approximately $212.8 million in assets and approximately $117.1 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)