Currency Wars: Selling The Rope

"The Capitalists will sell us the rope with which we will hang them." Vladimir Ilyich Lenin

There were a number of Wall Street scions who most infamously associated themselves with Hitler's financiers, and were more than willing to ride the National Socialist tide in Europe for their own benefit come what may, to the extent that they did not stop their activities in supporting the Reich until called out by the government through the Trading with the Enemy Act in 1944.

Why bring that up now? Because that same sort of short term, greedy, amoral thinking is taking the US down a similar path with nations who, while the comparison with Hitler is inappropriate, are certainly no kindred spirits or friends of liberty.

When the truth comes out, the perpetrators will claim ignorance, or victimization, when in fact they have been roundly selling out their country through the blind pursuit of crony capitalism, to the detriment of the people and their country.

The real enemy is not Russia or China, although they are certainly inimical to freedom. The foulest enemy is a domestic predator class, famous for a character that 'would sell their mother for an eighth,' more than willing to sell the future of your grandchildren. They abuse the law, the media, and the integrity of justice to obtain their ends. They are without oath or honor.

And when the time comes, they will prescribe draconian measures and proto-fascism, in an attempt to further consolidate their own personal power, and the benefits provided to themselves and their wealthy friends, under the excuse of the approach of danger from abroad.

"The IRA: This is the idiocy of the U.S. position. We have set ourselves up as an easy target for our enemies. It is astounding that the Chinese have not been more aggressive in selling dollars. Maybe they are going to manage our downfall gently.

Rickards: I think the Chinese probably are doing it gently. The Japanese and Chinese are both influenced by Zen which, in Western jargon, is really about optionality. The whole idea of Zen is to avoid black and white decisions and instead create a range of options and possible outcomes. Instead of committing yourself to a binary decision, you create a fan of probabilities and look for your openings. So in that sense, if you think of it in options space, the Chinese are probably content to play the American paper game with the dollar, but all the while preparing for the day when the dollar collapses completely.

The IRA: Americans are convinced that it cannot happen here, the greatest nation on earth. Reminds us of France after WWI. Same degree of self-delusion. And no reaction by U.S. officials to the Chinese and Russia gold purchases?

Rickards: The Russians do not hide their purchases of gold. The incremental growth of Russian gold reserves is visible in their monthly statistics. The Chinese have been more surreptitious in their purchases but even they have announced the reserves doubled in recent years. The way that both of these nations add to gold without impacting the global price is that they are buying from internal, captive producers. And they pay below market prices because even paying $800 per ounce still gives their miners a tremendous profit. Between 2004 and 2008, China almost doubled the gold stocks of Peoples Bank of China, but they bought it through other state agencies to keep it off their books. (There were some analyst reports out this morning that the Chinese will not buy more gold for their reserves. This is the typical 'opinion' that is used to support bear raids by the banks and hedge funds, nothing more. It was utter nonsense. These fellows 'talk their book' with the same concern that you have to change your underwear. In other words, painting a story that is false but sells their product is a basic tool in their repetoire. - Jesse)

The IRA: So there is the pretense of coordination among the G-20, but meanwhile China is preparing to operate in a hard currency world. Is this a good way to describe your view?

Rickards: We have been operating in a dollar world for decades. Notwithstanding the demise of Bretton Woods in 1971, it's still a dollar system. All of the world's expectations, all of its productive capacity, all of its allocations of capital are built around that system. When the caretakers of that system allow weeds in the garden and for the system to disintegrate and fall apart, which is what I see happening in the U.S., the immediate reaction is first confusion, then panic and then self help. This gets to the heart of the national security implications of the financial crisis. Initially other nations were content to wait for the U.S. response, but now I see nations like China, Russia and Germany increasingly willing to act on their own...

The IRA: So here is the question: if the U.S. has its head buried in the sand, who is the leader of the global currency system going forward?

Rickards: Well, the leader of the process is not clear. This gets back to a whole series of very revealing interviews given by Treasury Secretary Timothy Geithner in the late 1990s that we have to dig out. He embraces something that he calls "convening power," I call it "a bunch of guys." Geithner's world view essentially consists of getting the finance ministers or heads of state in a room, developing an agenda, and then pursuing that process wherever it takes you. I think the US has embraced multilateralism within the G-20 as an alternative to U.S. leadership. I think we look at the G-20 differently than does China, Russia, Brazil and some others. The U.S. looks at the G-20 as a kind of benign, kumbaya, kind of global board of directors that working with the IMF can bring the world in for a soft landing. I don't think the Chinese or the Russians see it that way. They see the G-20 as an interesting tool but from a state-centric view.

The IRA: Geithner's strategy, if you can call it that, reminds us of the shallow management pretense visible in many Wall Street firms. The Chinese and Russians see themselves in the ascendancy and, unlike the U.S., these nations have a vision of where they want to be a century from now. Americans just want to borrow more money."

Chris Whalen, The Institutional Risk Analyst, July 7, 2010

The macro trend is a change in the post Bretton Woods international currency system that is reaching a point of instability, and the decline and fall of the dollar from its postwar imperium. The US and UK will promote the adoption of the SDR, because they exercise a measure of control over the IMF. The BRIC's will accept this because they have little practical alternatives. Therefore the real battle will be the negotiation of the content of the SDR when they rebalance it this year. The Anglo-Americans want no change, but might accept the inclusion of the yuan at a higher exchange rate. The BRIC's want gold and perhaps silver to be included, and a broader basket of currencies from the rising economic powers. It will be quite the geo-political dance.

What is disconcerting to me, and you can see it to some extent in Rickards own work, is that the Wall Street financiers clearly have their eyes on the Pentagon budget: opaque, patriotically defensible, and huge. A currency war, with the Wall Street crowd providing tactics and weaponry and mercenaries to both the US and to its adversaries, might make the bonuses taken from the mortgage bubble look like pocket change by comparison. Its an old idea really, the basis of some legendary fortunes, adapted to the modern world. It produces nothing but misery, while transferring wealth from the many to the few.

“Earth provides enough to satisfy every man's need, but not every man's greed." Mohandas K. Ghandi

Charts: Gold, SP 500, Silver, HUI, Gold/Euro

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SP 500 September Futures Daily Chart



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Miner's Index (HUI)



Gold / Euro Correlation

BIS In 380 Tonnes of Gold Swaps; Organized Looting of Sovereign Wealth; No Confidence

"Manipulation can only go so far…..especially when gold is reverting to its primary function which is as a currency in its own right or as means to substantiate existing currencies." Richard Henley Davis

These swaps have significance because of the speculation that the public sale of gold by the IMF, which was secretive and selective, was not a legitimate sale to raise funds, but a means of bailing out the bullion banks who had taken gold previously on lease and sold it into the public markets, but were unble to return it because of the tightness of supply in the physical bullion market, increasingly disconnected from the NY based paper market.

Several private bullion buyers, including Eric Sprott, are reported to have made firm and well priced offers to buy large tranches of gold from the IMF, only to be curtly turned away as 'ineligible.' The IMF is selling at the prices they determine ex-market to the people to whom they wish to sell. It appears that they, and certain European central banks, may be managing this through BIS.

Just as Gordon Brown sold England's gold at artificially low prices to bail out the bullion banks in NY and the City, so the IMF and its constituent members are selling the public stores of gold, largely from a few developed western nations, to support what essentially appears to be a crony capitalist banking fraud involving the secretive sale of public assets at artificial prices with the gains pocketed by a few state-sponsored banks.

"Gold swaps are usually undertaken between monetary authorities. The gold is exchanged for foreign exchange deposits (or other reserve assets) with an agreement that the transaction be unwound at an agreed future date, at an agreed price. The monetary authority acquiring the foreign exchange will pay interest on the foreign exchange received. Gold swaps are typically undertaken when the cash-taking monetary authority has need of foreign exchange but does not wish to sell outright its gold holdings (at least not on their own books - Jesse). In that manner, gold is a leveraging device. Gold swaps sometimes involve transactions where one of the parties is not a monetary authority (usually it is another depository corporation). Gold swaps between monetary authorities do not usually involve the payment of margin."

Repurchase Agreements, Securities Lending, Gold Swaps and Gold Loans, An Update - IMF

Some parties have mistakenly asserted that since a swap is not a lease for accounting purposes, which is quite correct, then the gold could not have been sold. That is just a simplistic misconception. A swap transfers the benefits of the assets from one party to another for a period of time in exchange for interest paid, generally on forex received. Its does not sell the property but it transfers the mineral rights for a time, if you will.

The party that then holds that gold asset can just hold it, or they can utilize it in some way, such as leasing it out for a period of time to another party, like a bullion bank, who can subsequently sell it. These types of 'three way deals' were very commonly seen when Lehman and Bear Stearns started to unravel and they needed ot be unwound, and were a key component of the whole issue of hidden counter party risks. Remember that?

So on the books of the first party there are in fact no leases or sales shown, just swaps of varying duration and terms. But the swap has delivered an asset, in this case gold, into the hands of a party who may have no qualms about leasing that asset out to a third party to obtain funds, and that third party is likely to sell it. I would of course agree that this does not PROVE anything. How can it when the books of some of the parties are still opaque, and audits rarely conducted to verify ownership. But after what we have just seen over the last three years in these games of asset merry-go-round, how can anyone just blatantly dismiss that can and likely is happening, where there is an easy profit to be made. Especially considering the past history of transactions between the bullion banks and the central banks.

Personally I would view this report as bullish for the price of gold, since it is past history, and almost certainly an indication of concerns about Comex offtake. In other words, shortages are appearing, and fresh sources of bullion are becoming increasingly difficult to find.

John Brimelow reports that:

"The news of the day, of course, was the discovery by the Virtual Metals analyst (Matthew Turner) that the BIS engaged in what appears to have been the biggest gold swap in history prior to the end of their FY end on March 31st.

Thebulliondesk.com (first of the wire services to report) says:

“In its 2010 annual report, the BIS said that "gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold," stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009.

While the data is relevant to the end of BIS’ 2010 financial year in March, data posted to the International Monetary Fund and carried by Bloomberg show the swap still growing in April, analyst Andy Smith of Bache Commodities noted.

To now, this implies a swap of about 380 tonnes from the end of 2009, he said in a report.”

The new Washington Agreement, which started at the end of last September, allowed signatories to engage in gold derivative transactions for the first time in a decade. Very convenient.

Although none of the major bullion banks (actual or potential CB counterparties) will want to discuss this, the high probability is that much of this gold was actually sold into the market. Very likely this accounts for the contra-seasonal slump of gold in December, which it will be recalled was neither preceded by the usual loss of physical premiums nor accompanied by the usual open interest action.

This in effect means the end of the Washington Agreement restraint on CB gold selling, at a time when several signatories are in bad shape. Most likely this is what caused the selling pressure in gold today, especially after the NY open."

As we have most recently seen with the bloated CDS and CDO credit markets, long standing control frauds can cause quite a splash when they inevitably collapse. We need to bear this in mind when the governments start making their excuses, once again, for taking the 'necessary actions' to support the banks for the good of the people, from whom they have once again stolen billions to provide a fat living for their friends and themselves.

I have been wondering, as I am sure that you have as well, Why Now? Why did the IMF and BIS 'throw the kitchen sink' at the gold bullion market at this particular time?

I think the answer can be found in the setup of the market. Gold was knocking on the door of resistance at $1260, a key point that could have triggered a break away rally. At the same time, according to figures provided in his daily Comex commentary, there were an extraordinary number of contracts standing for delivery in silver and especially gold. Indeed, if the numbers are correct, a breakaway rally would have encouraged almost 2 million ounces of gold to be demanded of the Comex, a call on their 2.64 million ounces of dealer supply that could have literally 'broken the bank.'

As Volcker and Greenspan have both said, the central banks must stand ready to sell gold into the market to prevent its price from rising and displacing the confidence of the markets in the power of the central banks to manage their currency markets.

Economists are debating the reason why individuals and businesses are saving, and not spending money as a response to the Federal Reserve programs.

Here is a comment I wrote in response to an essay by Brad DeLong in the recent issue of The Economist, Why Are Firms Saving So much? I am not editing it here, and since it was done as an only draft, please bear with its somewhat raw form.

"Private firms and individuals are saving too much. DeLong seems to think they are being irrational, because they are doing so out of fear of a commercial credit crunch.

I think this is partly true. But some of the savings activity by companies (and individuals) is obviously because they are not seeing the turnaround in the economy that would give them the confidence to build up their capacity and inventories. They clearly fear another downturn based on what they are seeing.

Now, Mr. DeLong dismisses this, presumably because there is a central bank called the Fed, and it owns a printing press, and stands ready as a lender of last resort.

I think businesses know this, and the attitude and condescension is wholly unnecessary and distracting from the real issue.

Businesses, and individuals, simply do not believe that the Fed is interested in them, as opposed to let's say, the too big to fail banks. For whatever reason, Bernanke has blown his credibility, and done so most likely by talking a better game than he has played as the lender of last resort to the general economy, and not to a select circle of cronies, among which are not the local and regional banks, and certainly not commercial business.

The other fact, although I confess that I cannot prove it with data, is that the banks have troubles of their own, and prefer to use a portion of their funds for speculation, especially those TBTF fellows who are sitting on a lot of dodgy paper.

And finally, what has really changed in an economy that was almost wholly dependent on stock bubbles and mortgage fraud, and a consumer saturated with debt?

So, history stories notwithstanding, the solution to this might be a little closer to home than one might imagine otherwise from reading Mr. DeLong.

The efforts of the Fed and Treasury have NOT been focused on the locus of commercial transactions between private companies and individuals. Rather they have been preoccupied with the speculation in financial derivatives and paper assets that have little or no real connection anymore to the economy. So how can one even wonder that the people have lost faith in this effort?

Only if one assumes that they are irrational fools, incapable of understanding economics because they, after all, lack the necessary credentials and PhD's, as the Federal Reserve fellow so recently observed."

Despite all their dissembling and market antics, I think the Fed's worst fears are coming true. The people of the US are losing confidence in the Federal Reserve and its economic policies, and those of the Treasury which has badly mishandled the banking crisis. The problem is that Washington is talking to New York, and assuming the rest of the country will accept whatever it is they choose to do.

Crunch time is coming, and it will not be pretty. A loss of confidence and a hoarding of funds in savings is a prelude to Gresham's Law, and the first whiff of what I would have never expected could occur: hyper-inflation, preceded by a terrific market crash in late September. That is just how bad that the policy errors of Summers and Bernanke have been, and how badly the Congressional plutocrats have misunderstood the will of the people and failed to enact reforms.

It is going to be a long, hot summer.

Net Asset Value of Certain Precious Metal Trusts and Funds: Market Goon Sightings in the SP Futures

The premium on The Central Gold Trust, as compared to its historical mean, and the Sprott Physical Gold Trust, is quite interesting.

The Central Gold Trust's premium dropped to historic lows and has stayed down in the last underwriting, the sale from its shelf offering of additional units. Since those units were all committed to gold, after the offering is completed, the premium would be expected to return to the mean. Unless the gold cannot be delivered, or the banks led by the Canadian Imperial Bank of Canada are somehow unhappy with the Spicer family who manages it.

So, is the Gold Trust now being 'punished' by the banks, most likely by being part of a paired trade wherein the shares are being shorted for non-fundamental reasons, and most likely including naked shorts? I have seen no news, no serious reason, why such an anomaly should exist, except that in the the last major offering the Gold Trust did not pay what could be viewed as a 'subsidy' to their underwriters led by Canadian Imperial Bank of Canada. I would like to find a simpler explanation, but given the opaque nature of the markets that is hard to do.

In his most recent metals commentary, the usually soft-spoken and careful Ted Butler says that the Comex, the CME, and JP Morgan are running 'a criminal enterprise.'



Some bloggers have recently been highlighting the blatant manipulation in the futures markets in US equities. This is good work, and I thank them for it. This sort of thing has been going on for quite some time, and was in full flower in the rally of 2003-2006. The Visible Hand of Uncle Sam. But it is certainly becoming more blatant again lately.

It is the cooperative effort between the government and a few big Wall Street banks to manipulate markets as an instrument of foreign and domestic policy. It has been going on since at least the mid 1990's under what I call the Rubin / Summers Doctrine. This is why Obama would not dismantle the Too Big To Fail Banks as part of his financial reform bill. They are his army in the Currency Wars. And if they engage in a little recreational looting at home, well, that is the price one pays.

This week Paul Farrell calls the lack of effective reform the Failure of Obama's Presidency, or The Conspiracy of Weasels.

In this latest instance of 'crisis management,' saving the free markets by destroying them, the obvious manipulation showed up early in other markets like the precious metals, and is so obvious now that it almost boggles the mind. The metals get hit by concentrated selling out of New York after the London PM fix almost every day. Some of these same bloggers and their followers who now see the stock market manipulation have willfully ignored this, and hard to believe, even spoke disparagingly of those who pointed out these obvious market manipulation as the 'tinfoil hat' crowd.



GATA and Deep Capture have done great work in attempting to expose these problems, having rolled up their sleeves, and actually DONE something, and taken wagonloads of shit and derision for it, at times from some of the same crowd who are now waking up and seeing the market goons knocking on their own doors.

Compared to gold and silver, the SP futures are relatively easy to manipulate. You just don't lead them as much. Right Timmy? (Get some!)

Ain't kharma a bitch...