Bill Gross: I Am Leaning to Gold over Bonds

Now that Draghi has joined with Bernanke in buying the short end of the curve, pushing rates to negative returns, gold looks quite a bit better in terms of risk and reward.

Gold thrives in an environment of negative bond returns.

And since no action is being taken to reform the unsustainable banking system and the broken real economy, we can expect this monetization, under whatever guise or names one may wish to apply, to continue until something breaks.

Barring a major outbreak of war or other draconian actions by governments, and a major liquidity selloff in the financial markets, gold seems to have upside to $3,000 or so, and perhaps more. But it may take some time to get there. There are no free markets in this period of extreme monetary experimentation.

As for silver, that is harder to predict, given the demand/destruction from its industrial character, and the long term investment deficit created by the suppression of price which discourages investment.

I don't really see the CFTC taking on JPM over their silver short manipulation, or HSBC in gold for that matter, since it is likely that the governments are involved as well. But stranger things have happened.

Some gold advocates of my acquaintance were complaining that Mr. Gross is looking at GLD rather than a straight up bullion purchase. I think that is a bit unrealistic given the size of his fund and the scope of the potential demand, not to mention his position in the 'financial establishment.' One must bear in mind, however, that when a whale like Bill Gross speaks, he is wearing a 50,000 watt megaphone compared to most. So we ought not to discount the importance of what he says.

And who knows, he may already be invested in GLD and is now talking his book.

But I share the distrust that some have of GLD and SLV except as a short term paper exercise. Any failure of those instruments due to malfeasance would provide a leg up for the metals that would be rather impressive.

Net Asset Value Premiums of Certain Precious Metal Trusts and Funds

Mario Draghi pledged the ECB to 'unlimited' purchases of short term sovereign debt for any Eurozone country that requested such help, any objection from Germany notwithstanding apparently. There will be a court ruling in Germany over such matters on 12 September.

They are expected to rule in favor of this action because the purchase of troubled sovereign bonds will be done in the secondary market, rather than directly. This also provides a nice opportunity for the banks to 'front-run' the ECB.

I am wondering what if any 'conditions' a country might be expected to meet should they ask Draghi and the ECB for 'help.' That may be an overlooked detail.

The ECB has pledged to 'sterilize' any such market actions so that they will not provoke inflation. The purchasing will be done on the short end of the curve, 3 years and in, and the actions may serve to drive more private buying at the longer ends in search of positive yields. In some sense Draghi is just catching up to Bernanke.

But at the end of the day, this is monetization of sovereign debt for the sake of propping up a zombie banking system and failed political union.

I should add here a parenthetical remark, that the same dynamics that caused the faux union in Europe to fail under the policy strains of a single currency would happen on a much larger scale should the world adopt a single currency regime or a harder peg to the dollar.

One cannot have a single currency and monetary policy without a fully integrated political union, or a set of artificial barriers and supports that emulate transfer payments. One size rarely fits all.

As the economic health of a country ebbs and flows, this should be reflected in the strength and weakness of their national currency in a 'freely traded' marketplace. The only way to counteract this is by trade barriers and subsidies, or outright transfer payments.

This is a lesson that must be learned, or rather re-learned again, by the world apparently.

The equity market took off like a scalded cat, but gold and silver are being firmly capped with relatively modest gains. What else might one expect on the day before a Non-Farm Payrolls report?

The equity rally *might* be overdone a bit at 1430 on the SP 500, but a cautious man would not care to stand in front of it, except perhaps to hedge bullion positions and other long positions.

Still, the reality of the economy has not changed one bit, just another opportunity for hot money to chase risk. So a man of a speculative mind might begin to nibble on the skeptical side.

Gold Daily and Silver Weekly Charts - Russia Stockpiling Gold, Likely for a New Trading Currency

The markets in general paused before the ECB announcement tomorrow and the Non-Farm Payrolls number in the US on Friday.

Early today there was a violent 7.6 magnitude earthquake in Costa Rica, but fortunately the damage was contained, there were few deaths, and there were no tsunamis. This is good news.

FedEx warned last night which is an indication that the real economy is lagging. But in today's high powered money economy where the market is the economy, that may not matter in the short term. When the currency and the economy become disconnected, life can get wild on the tails of probability, and unlikely things can happen.

Why Is Russia Stockpiling Gold? - MarketWatch

Perhaps it is due to the effort by the BRICs to reconstitute the SDR, with some gold in the basket of currencies, as a major instrument for international trade when the US dollar falters as the world's reserve currency. It is the most important thing that no one is even discussing.

Big things are underway behind the scenes, the kind of sea change that everyone understands after the fact, but almost no one sees coming, especially those whose gaze is fixed from within deep wells of subjectivity.

"Look back over the past, with its changing empires that rise and fall, and you can foresee the future, too." Marcus Aurelius

The only certainty is change. Let's see what happens.

SP 500 and NDX Futures Daily Charts

The markets paused before the ECB meeting tomorrow and the Non-Farm Payrolls on Friday.