How Goldman and J P Morgan May Intend to Rape the Mining Industry (Again) and Take It Over 'On the Cheap' As Bullion Rallies

Those who have followed the mining industry over the years know how painful it was for those who had sold their bullion forward, on the advice of bullion banks like Goldman and J P Morgan, to unwind those hedges. The cost was company insolvency and a sale on the cheap for the smaller players, and billions in writeoffs for the larger, like Barrick Gold.

Perhaps a round of precision naked short selling and bullion price suppression will soften them up the cash strapped miners, and curtail their access to the alternative sources of capital and credit enough to prompt some soft-headed and desperate CEO's make their (sometimes self-serving) deal with the devil again.

You will forgive me if I wonder if Goldman would be taking the other side of this trade with their customers, waiting gleefully for the day when their 'forecast' proved to be wrong, and the miners found themselves unwittingly in their greedy little hands, God's work having been done once again.

And if they are caught, well, the going price of fraud on a massive and obvious scale seems to be about $550 million, so that will have to be factored into the business plan. Short sales on the collateral damage should cover that cost of doing business nicely, and keep the moral hazard and faux regulators happy.

And as for investors, they may wish to consider putting any miner who buys into this scheme on their 'do not buy' list. Although it should be noted that Barrick had a few good years, while its peers suffered, for its betrayal of its industry and ultimately its shareholders, when the devil had his due. In the famous New Orleans lawsuit they claimed that they had been working with JPM at the behest of the Federal Reserve.

Are the BIS, the IMF, the ECB, and the Fed starting to scrape the bottom of their bullion barrel, requiring fresh sources of physical to sell into the market, and feeling the twinges of anxiety that disclosure is near, the jig is up? Hope so. Could not happen to a more deserving group. And I hope to live to see the day.

Mineweb
Goldman predicts falling gold price beyond 2011, recommends gold hedging
Lawrence Williams
Thursday, 15 Jul 2010

Goldman Sachs has raised its medium term gold price forecast to $1,355, but reckons prices will fall from 2011 and recommends producers sell gold forward.

LONDON - Plus ça change. Goldman Sachs is suggesting that mining companies sell gold forward again. The logic behind this is that although the bank reckons the gold price will increase to $1,355 an ounce over the next 12 months - a tiny increase from its earlier prediction of $1,335 - beyond that it is looking for prices to stabilise and fall as the U.S. Fed tightens monetary policy and the recession is seen to be ending.

Of course the big gold banks, of which Goldman is probably the most successful, can do very well out of its clients hedging their gold forward whatever the fortunes of its clients in so doing. It was notably the bank which reputedly advised Ashanti Goldfields to sell its gold forward at gold's low point back at the end of the 1990s - a policy which brought the gold miner to its knees leading to its takeover by AngloGold - another Goldman client. Indeed commentators have suggested that Goldman made profits on every angle of the Ashanti hedging debacle, and on the sale of one of its clients to another.

Goldman would probably counter that its primary responsibility was to its shareholders - perhaps even more so than its clients - and that the sudden turn-around in the gold price which caused Ashanti's effective bankruptcy, was completely unforeseen, but the whole episode left a bitter taste that lingers to this day, particularly in Ghana where Ashanti was seen as the country's major gold player on the world scene.

However, the fact that Goldman is still looking for an increase in the gold price, even if only over the next 12 months, is positive for gold. The bank actually forecast a six-month gold price (effectively a year-end figure) gold price of $1,290 rising to the $1,355 figure over the following six months. With predictions being regularly updated (the latest figure is an update from Goldman's previous one of only three weeks earlier) the position may again change depending on how quickly the global economy is seen as recovering.

Goldman also delivered forecasts for base metals and silver, all of which ranged higher than previous ones apart from zinc where the bank was looking or an 18% fall.

Should the Fed Buy Gold At $5,000 per Ounce? Should Mexico Go to a De Facto Silver Standard?

These are two different interviews on two related topics: the place of specie in the reconstitution of national currencies in facilitating the recovery from a financial crisis.

I have to confess that there were some historical observations made by Lee Quaintance that made me scratch my head, wondering if we were coexisting in the same or parallel universes. I have tried to note them as they occurred in the text. What was most puzzling is that they seemed to be inserted in a line of thinking with which I was in completely agreement. Perhaps I just need another cup of coffee.

But in sum I found both interviews innovative and thought provoking. The concept of using Gresham's Law to induce people to save is interesting. I think the valuation model which my friend Hugo puts forward for a silver coin needs some work and some further thought, most likely on my part.

The status quo of economists and financial engineers, with their attendants politicians, will just hate these ideas. So I would not expect them to gain much traction, until things get substantially worse than they are today.

Hugo Salinas-Price on the Silver Peso and Deflation: Should the Fed be Buying Gold?
Chris Whalen, Institutional Risk AnalystJuly 19, 2010

"The difficulty lies, not in the new ideas, but in escaping from the old ones."

John Maynard Keynes
(1883-1946)

In this issue of The Institutional Risk Analyst, we shift focus from the U.S. to Mexico and feature a comment by Hugo Salinas-Price on his proposal for a silver-peso coin. We saw such a big response to the conversation with Jim Rickards about a gold-backed euro ("Paper Gold vs the Dollar? Interview with James Rickards," July 7, 2010) that we wanted to come back to the subject by speaking with an old friend from one of our favorite countries.

Salinas is founder, former chief executive officer, and honorary president of Grupo Elektra, the Mexican retailing company. He is also founder of the Mexican Civic Association Pro Silver, which for 10 years has been advocating the introduction of a monetized silver coin in parallel circulation with fiat pesos in Mexico. Legislation to that effect now is under serious consideration before the Mexican Congress.

Salinas describes the Mexican peso as a "derivative" of the dollar, a troubling prospect since, as we discuss below, the dollar itself is a derivative of nothing, at best a mere representation of a unit of work. But before we go to our feature, we need to comment on the latest minutes from the FOMC and the growing indication that the U.S. economy is continuing to slow.

To us, there is no "double dip" in the economy. We never recovered from the first decline in aggregate demand. Forget the bogus inflation and GDP statistics coming from Washington. Talk to your neighbors and family, the people in the community who own businesses. Ask them how their revenues for 1H 2010 are doing YOY...

In response to mounting concerns about deflation, news reports are filled with speculation that the Federal Reserve System will "ease" monetary policy further, an interesting idea given that interest rates already are at zero. The concept of further quantitative easing, as we understand it, would be for the Fed to purchase more securities from the Wall Street banks and hope -- repeat hope -- that a few pennies trickle down to the real economy. But mindful of the quotation from Lord Keynes above, maybe there is a better idea.

Last week The IRA spoke to Lee Quaintance, co-founder of QB Asset Management. Lee had worked in high yield credit and government bonds for several decades for the likes of Goldman Sachs (GS), CSFB and DLJ. Lee and his partner Paul Brodsky write a fascinating monthly market comment.

The IRA: So Lee, we see deflation as far as the eye can see but also rising costs. What's your view of the inflation/deflation debate amongst the chattering classes?

Quaintance: Credit inflations create asset bubbles that destroy the organic equilibrium mix between the factors of production. The deflation process curtails production and shrinks overall wealth but, ironically enough, redistributes a vast portion of the wealth that's left to the privileged few, mostly banks and government.

The IRA: We have created quite a mess.

Quaintance: A mess, yes, but, a predictable one nonetheless. Inflation and deflation are two sides of the same coin. Fiat currency and unreserved lending privileges are the root causes of all these imbalances. Throw in a bit of greed and malice too no doubt. The Austrians modeled it and predicted it. The Keynesians make excuses for it.

The IRA: Years ago, we made our friend Bill Janeway angry at us for calling Keynesian economics a coward's road to socialism (See "New Hope for Financial Economics: Interview with Bill Janeway," November 17, 2008). Now that we are at that endpoint, our political leaders are completely clueless. We have yet to find a single American politician able to talk about the role of the dollar in the global economy.

Quaintance: Have you asked yourself why most people have come to believe that deflation is to be avoided at all costs? It's painfully obvious to us -- because it destroys the banks and handcuffs the politicians. For everyone else, it's seemingly a zero sum game. Why all the fuss? (A zero sum game? Perhaps it has something to do with mass unemployment, and the transfers of wealth from the many to the few, the banks and the government, which Quaintance noted previously, leading to the decimation of the middle class, and a nation of hobos and millionaires. If all deflation did was destroy banks and harm politicians I would think it would be the most popular thing since the pre-elected version of Obama - Jesse)

The IRA: Well, if the U.S. economy continues to decelerate and deflate, we are going to see a lot of politicians facing mandatory "retirement" a la Harrison Ford in the film Blade Runner. A large portion of the U.S. population thinks that we are entitled to full employment, price stability and early retirement even as the government expands the deficit and currency at a double digit rates. The Chartalists think that we should just print money and use it to monetize all existing debt. The neo-Chartelist framework comes from the same intellectual wellspring as Keynesian economics and has been extended by the likes of Nobel laureate Bob Mundell. The current policy of the Obama Administration to borrow trillions of dollars to fund future deficits is similar madness, in our view, but is Fed-induced inflation better? What do you propose?

Quaintance: We have some basic views on what should be done and it comes in two steps. First, there needs to be a coordinated global currency devaluation. We argue for the Fed to tender for private gold holdings at something like $5,000 per ounce and to maintain that bid/offer. This would be the true economic/regulatory function of a central bank and/or monetary authority.

The IRA: The U.S. central bank has not had any gold holdings since FDR's expropriation of the private banking industry's gold in the 1930s. All of the gold in the Fed's vaults belongs to somebody else. We have a reserve bank with no reserves. So you would have the Fed buy gold rather than purchase more crap assets from the large dealer banks via a second round of quantitative easing (QE II)?

Quaintance: Precisely. The second step would be a major policy-mandated contraction in unreserved bank lending. These two simple steps would not only rebalance the financial books globally but would prevent leverage from over-inflating asset prices going forward, in turn creating another non-sustainable bubble economy. This isn't just theory. Let's look back. Employment trends in developed economies are being strangled presently by prior asset price inflation. As an admittedly crude example, the cost of shops on Main Street are overvalued and require artificially high rents to service debts. The average would-be shop owner can choose to pay his inflated lease or choose to pay workers - but not both. So, asset price inflation due to excessive unreserved credit expansion is not wealth enhancing but, rather, productivity destroying. (As a counterpoint though, it was not asset price inflation that started the process of breaking labor through offshoring and anti-union activity, a trend with its roots in the Reagan presidency, but general greed and lower tax rates on the monied interests. Why pay wages when you can pay yourself bonuses and tax free dividends to yourself and your friends? Capitalism has a natural dynamic to self-destruction, despite the mythology spun by the efficient market hypothesis folks. Given free rein, it will destroy itself by destorying its customers - Jesse)

The IRA: That is a structural problem. How does the Fed buying gold help?

Quaintance: You want organic employment growth? Lower the relative price of other factors of production. Boosting asset prices unilaterally while wage rates remain relatively stagnant is a recipe for unemployment. This is just common sense and it's what we're seeing today. The system yearns for more money, not more credit.

The IRA: Yes, their operating costs are rising but selling prices are compressed, just like our favorite Italian food dispensary in New York. As we have long argued with our friend Bill Greider, consumers and small businesses who do not do business with JPMorgan and Goldman Sachs are the big losers in the fiat system. You must be smart enough to surf the waves of inflation, not just swim with the tide, and that makes us all speculators. (It is really the arbitrariness of the money that is a root cause, and the creation of a monopolization of credit under an incompetent/corrupt Federal Reserve - Jesse)

Quaintance: Agreed. In the end, credit inflation historically leads to asset inflation while base money inflation leads to wage and basic goods/consumables inflation. No matter how you slice it, the ratio of outstanding global debts to global base money is irreconcilable. This is a mathematical tautology. From this imbalance flow many of the imbalances you cite, in my mind. Chris, as I said, we think this is as simple a problem as too little "money" in existence attempting to service and ultimately reconcile too much debt.

The IRA: So where do we go from here?

Quaintance: When the ratio of productive asset prices exceeds a theoretical limit vis-à-vis the other factors of production, the productive process breaks down. In the case of the U.S., it headed to developing economies overseas where labor demographics, regulatory apparatuses and asset pricing environments were far more in balance. This trend should continue until there is a serious reconciliation of that debt-to-base money gap.

The IRA: The one-sided era of free trade, with the U.S. open to all other nations but without reciprocity, has been like Smoot-Hawley in reverse, draining resources from the U.S. economy instead of what happened once WW II began. America ended up with much of the gold reserves and industry in the world but now we have swung to the other extreme. But most people don't realize that technological changes such as the electrification of the U.S. and resulting overcapacity in the 1920s drove the deflation of the 1930s, (What! How about the huge waves of bank failures? There is nothing like vaporizing a class of person's life savings to provoke deflation. How can someone make such a sweeping statement and ignore the most prominent feature of the time from an economic perspective! - Jesse) not the marginal increase in tariffs. Tariffs were already high and had been for 50 years. So Lee what we hear you saying is that we need another global reflation a la FDR's purchases of gold?

Quaintance: Yes. I abhor as much as the next guy proactive public sector administration of anything that a free market can manage better. But given the massive unreserved credit inflation of the last 20-plus years, a major -- and I mean major -- expansion of the global stock of base money must be administered ASAP to avoid further nominal private credit deflation and subsequent real economic contraction. Simply replacing vaporizing private debts with public debts is a mug's game -- a poorly-veiled requirement to inflate tomorrow. Why dance around the obvious here?

The IRA: So in a nutshell...

Quaintance: It's all about excessive unreserved credit having created real economic distortions that can't be reconciled through further debt creation. For a true financial reconciliation to occur the debt-to-monetary base ratio has to narrow significantly, and to set a sustainable course the growth rate of global money should be capped in a credible fashion. The easiest way to do this is by reinstituting and maintaining a true gold standard, at least for base money. This is not a radical notion. Remember the reason the gold standard "failed" historically was not the basic mechanics of hard money being "too restrictive". The problem has always been unreserved leverage that accompanies "gold standards" creating non-sustainable economic imbalances. There is plenty of gold, at the right price, to reserve all money and credit.

The IRA: The new $5,000 per ounce price for gold in greenbacks suggests a huge degree of suppressed inflation in the dollar system.

Quaintance: We see no other way to re-ignite the real economy and put it on a sustainable path. Policy makers are holding a burning match. They have to act or the markets and global trade partners will act for them.

The IRA: Thanks Lee.

And now to our feature. We have long believed that the U.S. government should issue silver and gold coins that are valued by weight. Most people are sophisticated enough to go down to their bank branch, look in the newspaper or online to ascertain the current value of silver or gold. By allowing the metal coins to trade on their intrinsic value instead of the arbitrary, political value assigned by the state, it would provide a way for average Americans to save and protect themselves from inflation. Hugo Salinas Price talks about how just such a system soon may be implemented in Mexico.

The Monetization of the "LIBERTAD" Silver Ounce in Mexico
By Hugo Salinas-Price
www.plata.com.mx

The correct diagnosis of the world's economic sickness is: there has been too much spending based on too much debt and there is a starvation of real savings.

What would be the treatment for the illness? Flush out the excessive debt accumulated by excessive spending with a laxative which will cancel that debt, and provide the patient with some healthy real money which he will greedily gobble up.

This is the philosophy which has led me to propose the reintroduction of silver money into renewed use in Mexico. I leave the cancellation of debt to others; my contribution is real, healthy money for the Mexican nation.

How to reintroduce silver into permanent use as money in Mexico?

First, since I do not wish to kill the patient, I prescribe a gradual introduction of silver into circulation, in parallel with fake money, which is the only kind of money in the world today. We shall gradually increase the amount of silver money in circulation in Mexico, as it circulates along with fake, fiat money.

It is necessary to take into account that although at one time - about a hundred years ago, in the case of Mexico - people calculated value in terms of weight of silver, today they would not be able to do so. People have become accustomed to using numbers to designate value.

Thus, if we want silver to circulate in the hands of the Mexican people, we must devise a silver coin to which is attributed a number. If the silver coin has a number officially attributed to it, the Mexican people will snap up all the coins they can afford to purchase, because they know they will be able to use the coin in commercial transactions at any moment - though we know they will not do so: they will instinctively save these coins (Gresham's Law). And that is what we want the patient to do!

There were silver coins circulating in many parts of the world, just after World War II. They had all disappeared from circulation a few years later. What happened? There was inflation of paper money all over the world, due to credit expansion. This inflation caused the price of silver to rise. Since all the silver coinage in circulation had engraved numbers signifying monetary value, and the engravings could not be erased, the silver coinage became more valuable if it was melted down into silver bullion. That sealed the fate of the silver coinage: it was all melted down and never came back. In fact, silver coins with engraved value can never come back as long as there is paper money in circulation - they will all suffer the same fate, they will all be melted down eventually, no matter what value is engraved, because paper or digital money leads to constant inflation.

You have Silver Eagle one-ounce bullion coins in the US, but they are purposely demonetized by having an engraved value of $1 Dollar; this makes them useless as ready money.

So the silver coin which is to be introduced into permanent circulation must have no engraved value. Providentially, there is such a coin in existence in Mexico: the "Libertad" pure silver ounce. We don't have to invent a new coin.

All we have to do is to obtain Legislation which will attribute a monetary value to this coin by means of a quote from the monetary authority, the Bank of Mexico. The quote will simply take the place of the engraved value.

It so happens that a former President of Mexico, Jose Lopez Portillo (1976-1982), tried to do just this, in a moment of inspiration, back in 1979. However, his legislation was defective and the measure was a failure because that legislation decreed that the Bank of Mexico should issue a monetary quote for the silver ounce, to depend directly on the international price of silver. The intention was excellent, but the legislation deficient, because the silver ounce bounced about in monetary value from day to day and no one could use it as money under those conditions. The law was allowed to lapse in 1981, but never repealed.

It took me many months of thought to find the solution to the monetization of the silver ounce, with no engraved value, but one day it came to me, right out of the blue: the Bank of Mexico must issue a quote which will give the Libertad a monetary value, but once given a monetary value, that value must not be reduced, under any circumstances! The central bank must stand ready to make an infinite market at the minimum quoted value. (I can see some a large hedge funds having fun with this one, testing the resolve of the Bank of Mexico. It probably needs more thought, as it is an absolutely pivotal point, and one on which the idea foundered before. I thought Hugo's idea of gold / silver for regulating international trade was brilliant, but I need to think more of how this one might survive the inevitable attacks of an unreformed financial system, capable of perverting almost anything it touches. - Jesse)

People will gladly receive a silver coin for savings, if it has a monetary value ascribed to it by a quote. But the quote must be stable, it must not be reduced - no one can accept as money, a coin whose monetary value may be less tomorrow that it is today. If we compare with paper money, a paper bill is acceptable because it says $100 pesos, and will always say $100 pesos. Its purchasing power may decline, but the bill will always say $100 pesos.

The same principle applies to a silver one ounce coin with no engraved value: if the quote is $300 pesos, the public must have the certainty that the quote will not be reduced. A fluctuating quote is what caused the failure of our former President's legislation: the coin had different monetary values from day to day, some days worth more, some days worth less.

On the other hand, people will joyfully accept a silver coin whose quote may be increased due to the increasing value of silver. In fact, this is an extremely powerful incentive to savings, and that is what we are looking for: more savings! No interest payment is necessary to entice people into saving this coin - silver is an irresistible magnet for savings. (The US is using it on a much smaller scale through the issuance of common coins with a marketing appeal, like the states and presidents series - Jesse)

So our proposed legislation is this:

The Bank of Mexico shall publish a monetary quote for the silver ounce, based on this procedure:

a. To the international price of silver in pesos, Bank of Mexico shall add a 10% seigniorage (profit) for itself. ($231.41 pesos X 1.1 = $254.55 pesos. Today's values of silver and pesos, at kitco.com)

b. The Bank of Mexico shall add to this, the cost of minting the silver ounce. ($254.55 + $19.02 estimate = $273.57 pesos)

c. The Bank of Mexico shall round out the sum of the two foregoing, to the nearest multiple of 5, to make the monetary value easy to remember. ($273.57 rounded out = $275 pesos quoted monetary value of the "Libertad" silver ounce)

d. When the international price of silver in pesos falls, the Bank of Mexico shall do nothing.

e. When the international price of silver in pesos rises and impinges upon the seigniorage of the Bank of Mexico, it shall increase the quoted monetary value to restore its seigniorage.

f. The Bank of Mexico shall mint sufficient quantity of Libertad ounces to satisfy market demand and prevent the appearance of a premium over the quoted monetary value of the Libertad.

By this means, the people of Mexico will have an ideal vehicle for savings and even those who cannot read or write will accumulate these coins as a family patrimony. A recent Mexican Treasury study discovered that 85% of all Mexicans do not have bank accounts. These are the candidates for savings in silver!

Under this legislation, the silver Libertad will never be melted down into bullion, as its predecessors. The coin will always be worth more as money, than as bullion.

A fall in the value of silver will not affect this coin. No matter how severe a collapse in the price of silver, this coin will always be preferable to any paper bill or digital money, because the paper bill and digital money have absolutely nothing to back them up, whereas this coin will always have some value due to its being silver. I find such a collapse hard to conceive, but one must take into account this possibility.

I cannot help adding that I believe that this silver money is what the whole world is waiting for, "waiting for the sunrise" out of our present deathly darkness. I believe that if it becomes a reality, it will be an enormous success.

Three Interesting Interviews on King World News

John Williams of Shadow Government Statistics on the Economy

• US is in the structural change of an Economic Depression and is starting the next leg down.
  
  
• Heavy dumping of US dollar assets is coming which will inhibit the Fed's ability to monetize and the Treasury's ability to issue new debt; this will trigger very serious inflation problems leading to genuine hyperinflation.

Ted Butler on the weekly action in the Precious Metals Markets

• Friday's price declines on Friday were nothing but 'crooked dealers on the Comex trying to liquidate as many technical funds and speculative longs as possible.
  
  
• You cannot rule anything out in a manipulated market, but the selling appears to be coming to an end.
  
  
• In the Financial Reform Bill the Congress has given strong direction to the CFTC to look into position limits. (The CFTC now has all the tools they need to regulate the manipulation in the US markets, but I am not holding my breath while Gary Gensler is in office as Chairman. - Jesse)

Matt Simmons on the Oil Markets and the Gulf Oil Spill

• BP has been lying and covering up the incident in the Gulf of Mexico from day one, because of the risk of criminal prosecution for gross negligence
  
  
• People who live in the Gulf states are still in danger because of lethal methane gas. A hurricane may bring up a poisonous lake of toxic oil from the bottom of the Gulf. He believes that we might be facing one of the largest losses of life from a natural non-war related disaster.
  
  
• The practical solution is a small diameter nuclear device to glass over the well bore. The nuclear device offers no risk.
  
  
• The skimmers are only wiping up the scum but are not addressing the real problem.
  
  
• BP will have to be liquidated to cover all the claims. Apache might buy the North Slope of Alaska which is a good development because BP is irresponsible. BP's stock will effectively become worthless.
  
  
• BP continues to perjure itself and manipulate the press. They are distracting attention from the real problem which is a much bigger leak that cannot be controlled by this cap.

Both John Williams and Ted Butler make sense to me, since they talk about areas in which I have experience and adequate knowledge for a probability.

I do not know enough or have enough data to have an informed opinion on what Matt Simmons is saying. It is hard to believe that the government could be so incompetent to take the risks that he outlines. It should be relatively easy for the US Navy to lead an effort to ascertain if some of the things that he says is true.

If he is wrong, then his reputation and credibility will be destroyed. If he is right, the Obama government, BP, and possibly the corporatocracy will be brought down in a spasm of popular rage.

I sincerely hope he is completely wrong, and would have to view some of his claims with skepticism until proof emerges.

False flag in September, anyone? You just know that is being teed up as an option on Obama's policy plate by the neo-Machiavelians in his administration.

Nothing Was Sacred: The Theft of the American Dream

America must decide what type of country it wishes to be, and then conform public and foreign policy to those ends, and not the other way around. Politicians have no right to subjugate the constitutional process of government to any foreign organization.

Secrecy, except in very select military matters, is repugnant to the health of a democratic government, and is almost always a means to conceal a fraud. Corporations are not people, and do not have the rights of individuals as such.

Banks are utilities for the rational allocation of capital created by savings, and as utilities deserve special protections. All else is speculation and gambling. In banking, simpler and more stable is better. Low cost rules, as excessive financialisation is a pernicious tax on the real economy.

Financial speculation, as opposed to entrepreneurial investment, creates little value, serving largely to transfer wealth from the many to the few, often by exploiting the weak, and corrupting the law. It does serve to identify and correct market inefficiencies, but this benefit is vastly overrated, because those are quickly eliminated. As such it should be allowed, but tightly regulated and highly taxed as a form of gambling.

When the oligarchy's enablers, hired help is the politer word, and assorted useful idiots ask, "But how then will we do this or that?" ask them back, "How did we do it twenty years ago?" Before the financial revolution and the descent into a bubble economy and a secretive and largely corrupted government with a GDP whose primary product is fraud.

Other nations, such as China, are surely acting for their own interests, and in many cases the interests of their people, much more diligently and effectively than the kleptocrats who are in power in Washington and New York these days. How then could we possibly subvert the Constitution and the welfare of the people to unelected foreign organizations? If this requires a greater reliance on self-sufficiency, then so be it. America is large enough to see to its own, as the others see to theirs.

Economics will not provide any answers in and of itself. Economics without an a priori policy and morality, without a guiding principle like the Constitution, is a heartless monster easily manipulated to say whatever one wishes it to say, if they are willing to pay enough economists to say it. Its reputation as a science is greatly exaggerated.

"Eliminating government" is a trap put forward by the plutocrats for those unable to reason except by prejudice, as they desire to exercise their power unimpeded by the rule of law. Once you knock down the protections and the safeguards in the name of reform, the wolves will turn on the public in an orgy of looting and exploitation. This is an old story, and sadly it often works.

Efficient markets hypothesis is almost as great a hoax as the benefits of globalization and 'free trade' have been to the American people as a whole. These things are promoted by the few, at the expense of the gullible many, for their own personal benefit.

Hatred, mean spiritedness, and resentment of the weak, the old, the different, is a trick played on the masses by oligarchs and would be dictators from time immemorial. They play to the darker side of the crowd. It is a trap, and the means to the demise of freedom. And these tricksters play it well, because deceit is their specialty, their stock in trade.

"First they ignore you, then they ridicule you, then they fight you, then you win." - Mohandas K. Gandhi

So it will not be easy, and it is a mistake to think that it will be. But what greater task can we set ourselves to, other than justice and freedom for ourselves and children?

It’s the End of the World As We Know It
By Phil of Phil’s Stock World

What are 308,367,109 Americans supposed to do?

First of all, despite clamping down on immigration, our population grew by 2.6M people last year. Unfortunately, not only did we not create jobs for those 2.6M new people but we lost about 4M jobs so what are these new people going to do? Not only that, but nobody is talking about the another major job issue: People aren’t retiring! They can’t afford to because the economy is bad – that means there are even less job openings… The pimply faced kid can’t get a job delivering pizza because his grandpa’s doing it.

There are some brilliant pundits who believe cutting retirement benefits will fix our economy. How will that work exactly? Pay old people less money, don’t cover their medical care and what happens? Then they need money. If they need money, they need to work and if they need to work they increase the supply of labor, which reduces wages and leaves all 308,367,109 of us with less money. Oh sorry, not ALL 308,367,109 – just 308,337,109 – the top 30,000 (0.01%) own the business the other 308,337,109 work at and they will be raking it in because labor is roughly 1/3 of the cost of doing business in America and our great and powerful capitalists have already cut their manufacturing costs by shipping all those jobs overseas, where they pay as little as $1 a day for a human life so now, in order to increase their profits (because profits MUST be increased) they have now turned inward to see what they can shave off in America.

How does one decrease the cost of labor in America? Well first, you have to bust the unions. Check. Then you have to create a pressing need for people to work – perhaps give them easy access to credit and then get them to go so deeply into debt that they will have to work until they die to pay them off. Check. It also helps if you push up the cost of living by manipulating commodity prices. Check. Then, take away people’s retirement savings. Check. Lower interest rates to make savings futile and interest income inadequate. Check. And finally, threaten to take away the 12% a year that people have been saving for retirement by labeling Social Security an “entitlement” program – as if it wasn’t money Americans worked their whole lives to save and gave to the government in good faith. Check.

As Allen Smith says: “Ronald Reagan and Alan Greenspan pulled off one of the greatest frauds ever perpetrated against the American people in the history of this great nation, and the underlying scam is still alive and well, more than a quarter century later. It represents the very foundation upon which the economic malpractice that led the nation to the great economic collapse of 2008 was built. Essentially, Reagan switched the federal government from what he critically called, a “tax and spend” policy, to a “borrow and spend” policy, where the government continued its heavy spending, but used borrowed money instead of tax revenue to pay the bills. The results were catastrophic. Although it had taken the United States more than 200 years to accumulate the first $1 trillion of national debt, it took only five years under Reagan to add the second one trillion dollars to the debt. By the end of the 12 years of the Reagan-Bush administrations, the national debt had quadrupled to $4 trillion!“

Both Reagan and Greenspan saw big government as an evil, and they saw big business as a virtue. They both had despised the progressive policies of Roosevelt, Kennedy and Johnson, and they wanted to turn back the pages of time. They came up with the perfect strategy for the redistribution of income and wealth from the working class to the rich. If Reagan had campaigned for the presidency by promising big tax cuts for the rich and pledging to make up for the lost revenue by imposing substantial tax increases on the working class, he would probably not have been elected. But that is exactly what Reagan did, with the help of Alan Greenspan. Consider the following sequence of events:

1) President Reagan appointed Greenspan as chairman of the 1982 National Commission on Social Security Reform (aka The Greenspan Commission)

2) The Greenspan Commission recommended a major payroll tax hike to generate Social Security surpluses for the next 30 years, in order to build up a large reserve in the trust fund that could be drawn down during the years after Social Security began running deficits.

3) The 1983 Social Security amendments enacted hefty increases in the payroll tax in order to generate large future surpluses.

4) As soon as the first surpluses began to role in, in 1985, the money was put into the general revenue fund and spent on other government programs. None of the surplus was saved or invested in anything. The surplus Social Security revenue, that was paid by working Americans, was used to replace the lost revenue from Reagan’s big income tax cuts that went primarily to the rich.

5) In 1987, President Reagan nominated Greenspan as the successor to Paul Volcker as chairman of the Federal Reserve Board. Greenspan continued as Fed Chairman until January 31, 2006. (One can only speculate on whether the coveted Fed Chairmanship represented, at least in part, a payback for Greenspan’s role in initiating the Social Security surplus revenue.)

6) In 1990, Senator Daniel Patrick Moynihan of New York, a member of the Greenspan Commission, and one of the strongest advocates the 1983 legislation, became outraged when he learned that first Reagan, and then President George H.W. Bush used the surplus Social Security revenue to pay for other government programs instead of saving and investing it for the baby boomers. Moynihan locked horns with President Bush and proposed repealing the 1983 payroll tax hike. Moynihan’s view was that if the government could not keep its hands out of the Social Security cookie jar, the cookie jar should be emptied, so there would be no surplus Social Security revenue for the government to loot. President Bush would have no part of repealing the payroll tax hike. The “read-my-lips-no-new-taxes” president was not about to give up his huge slush fund.

The practice of using every dollar of the surplus Social Security revenue for general government spending continues to this day. The 1983 payroll tax hike has generated approximately $2.5 trillion in surplus Social Security revenue which is supposed to be in the trust fund for use in paying for the retirement benefits of the baby boomers. But the trust fund is empty! It contains no real assets. As a result, the government will soon be unable to pay full benefits without a tax increase. Money can be spent or it can be saved. But you can’t do both. Absolutely none of the $2.5 trillion was saved or invested in anything.

That is how the largest theft in the history of the world was carried out. 300M people worked and saved their whole lives to set aside $2.5Tn into a retirement system that, if it were paying a fair compounding rate of 5% interest over 40 years of labor (assuming an even $62Bn a year was contributed), would be worth $8.4Tn today – enough money to give 100M workers $84,000 each in cash! The looting of FICA hid the massive deficits of the last 30 years in the Unified Budget. Presidents and Congresses were able to reduce taxes on the wealthiest Americans without complaint from the deficit hawks, because they benefited. The money went directly from the pockets of average Americans into the pockets of the rich.

Now that it is time to repay those special bonds in the Trust Fund, we are inundated in opinion pieces in the leading newspapers and magazines complaining about Social Security and its horrible impact on the budget. Government finances have been trashed by foolish tax cuts, unpaid wars, tax loopholes for corporations and the very wealthy, the failures of economists, the greedy search for greater returns in financial markets and the collapse of moral values in giant businesses, but Social Security is supposed to be the problem that needs fixing…

Social Security is not “broken“–the money is in the Trust Fund. But the people who manage the finances of the United States don’t want to repay the bonds held by the Trust Fund. They want to default selectively against average people, their fellow citizens, who paid their taxes expecting to be protected in their retirement. Refusing to repay the $2.54 trillion dollars in bonds held by the Social Security Trust makes the US look like Greece, just another nation unable to govern itself coherently. The people who manage US finances come from the financial elites, the best that Wall Street and enormous corporations have to offer. Selective default exposes them as charlatans. The claims of the economics profession to expertise are puffery. Their theories about the benefits of tax cuts are proven false. Their mathematical proofs about free markets collapse in the real world.

So, what is this all about? It’s about forcing 5M people a year who reach the age 65 to remain in the work-force. The top 0.01% have already taken your money, they have already put you in debt, they have already bankrupted the government as well so it has no choice but to do their bidding. Now the top 0.01% want to make even MORE profits by paying American workers even LESS money. If they raise the retirement age to 70 to “balance” Social Security – that will guarantee that another 25M people remain in the workforce (less the ones that drop dead on the job – saving the bother of paying them severance).

What’s next? Is it fair to say that children can’t work in a struggling family business? Isn’t it to everybody’s benefit that kids should be allowed to help out at the family store? That will be the next step towards turning America into a 3rd World country. The seemingly innocent concept of “letting” kids work will deprive another 5M people of paying jobs – throwing them out into the labor force as well and driving labor costs down even further.

There’s an expression that goes “give them an inch and they’ll take a yard.” The top 0.01% of this country have taken their inches and they are foreclosing on the yards and they will come for the rest of your stuff next. If you think you are “safe” from the looting of America, it is only because they haven’t gotten around to you yet. As I explained in “America is 234 Years Old Today – Is It Finished?” – the game is rigged very much like a poker tournament. The people at the top table don’t care how well you do wiping out your fellow players at the lower tables, they know they will get you eventually and your efforts to scoop up a pile of cash for yourself simply makes their job easier when they are ready to take it from you.

The average American is $634,000 in debt thanks to the efforts that Reagan and Greenspan put in motion 30 years ago and the richer you are, the more of that money is going to come out of your hide eventually and the more you lobby to make sure that the “rich” are not taxed unfairly, the less fair it will be to you because, no matter how rich you THINK you are, unless your income is measured in MILLIONS PER MONTH, you aren’t even close to the top 30,000.

No progressive tax? That means that people and corporations who make $1M PER DAY should pay no more tax than a person making $1M per year, right? Well that means that the $2.5M debt that your family of four owes will be paid by you over 2.5 years of labor while the $2.5M owed by your Billionaire competitor will be paid over a long weekend, after which he can turn his attention back to crushing your business by creating cheaper goods – maintaining profit margins by driving down local labor costs and outsourcing the rest.

It’s a new world, America, and you’d better get used to it – we were sold down the river on a slow boat to China long ago and we’re only just beginning to feel the first effects of waves that wash back to our own shores. The people who own the media don’t want CHANGE. That’s why you never hear this stuff in the MSM – things are going exactly according to plan and the old money crowd is playing a long, patient game and they already have most of the chips – the last thing they want is people questioning the system…

Weekend Viewing: Echos from the Last Great Depression

An uncanny echo from times gone by...

Charlie Chaplin, The Great Dictator, October 1940



Mohandas K. Gandhi, The Power of Civil Disobedience and Non-Violence



Adolf Hitler, Nationalsozialistische Deutsche Arbeiterpartei, 1933-1938

"For we wrestle not against flesh and blood, but against principalities, against powers, against the rulers of the darkness of this world, against spiritual wickedness in high places." Ephesians 6:12

Beware the will to power, for madness has no master. We become what we hate, what we have sworn to destroy, and take up its methods, and serve it faithfully on this earth, thinking we are serving ourselves, forswearing all others, in defiance and expediency even God, to our own inevitable destruction. The beast prospers none, consuming all.

"Having fallen from the eternal, the Evil One's desires are endless, insatiable. Having fallen from pure Being, he is driven by the desire to possess, to fill his emptiness. But the problem is insoluble, always. He is compelled to have and to hold, to possess and consume, and nothing else. All he takes, he destroys." Denis de Rougemont

SP 500 September Futures Daily Chart and Gold Chart at the Close: Option Expiry Bear Raid

I had thought that the SP 500 would fail at a slightly higher level, the blue resistance trendline, but apparently that is not the case, at least for now.

Earnings misses in the banks and key tech bellwethers is driving the selling, and not coincidentally on the option expiration Friday for July. Michigan sentiment came in at a very low 66.5 which was well below expectations. At least for now belief in the recovery is off the table.

I beefed up my short positions in the financials as part of the short stocks / long gold & silver paired trade the other day, and this appears to be working reasonably well, giving me some room to play behind the shorts to add selectively at throwaway prices in the better miners and in bullion.

I am looking for a move down to the 1050-1060 area before the SP tries to back and fill itself on support. If it breaks down from there then the 1000 level looks possible. Keep in mind that this is a trader's market, and fundamentally it isn't telling us much of anything, except that a lack of financial reform has made the US a nation dominated by frivolous speculators who add no value and tax real GDP through price distortion.



Gold and silver were hit very hard with yet another bear raid, with the paper crowd trying to trigger selling by smashing prices with program selling at key moments and price points, running the stops and scaring the weak hands out. This is how the game is played, and particularly so in this environment of big players and lax regulations.

I don't think this precious metals selling will last much longer, but we have to keep one eye on stocks to see if there is a great move to a general sell off and act accordingly. That means little or no leverage, conservative positions, and hedging against loss. Or better yet, don't bother with the market at all except in long time frames.



Despite the rumours and rationales spread by hedge funds and trading desks like this commentary here, this was obviously a bear raid tied to today's stock options expiration. No profit motivated professional trader dumps positions like this and sells against themselves unless the motive is to drive down the price and run the stops, clearing out the weak hands and taking profits from short positions in related trades. Now that 'sales by the IMF' has gotten tired through repetition it looks like 'liquidation by John Paulson' (JP) is the new bear trade precious metals boogeyman. More likely "JP" is in reality "JPM."

A Modest Proposal

ShadowStats: CPI-Alt Running 4.3%, Gold $2,382, Silver $139

Something Weimar this way comes?

There is almost no doubt in my mind that we will see these prices of $2382 for gold and $139 for silver. I am just not sure exactly how we will get there, and when. But we should expect the unexpected, or at least that which is not expected by the many.

The gold / silver ratio between those prices is 17, which is close to the historically important ratio of about 16. The legal ratio of gold to silver set in France in 1803 was 15.5, and this was emulated in England and later in the US.

Obviously I am thinking of a possible return to a bi-metallic 'weak standard' through the inclusion of both gold and silver in the basket of currencies that will be replacing the US dollar as a unit of value in international trade. There are also several movements in the developing world to adopt silver for domestic use as a store of value and at least partial backing for their currency when the more prominent fiat currencies begin to hyperventilate. I think these movements will gain some traction as the currency wars intensify.

The current ratio is about 67. I cannot help but feel that silver is going to be simply amazing when its time comes, in part due to the decades of price suppression by US banking institutions.

According to the latest report from Shadowstats:

Alternative Consumer Inflation Measures

"Adjusted to pre-Clinton (1990) methodology, annual CPI inflation was roughly 4.3% in June 2010, versus 5.4% in May, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, was about 8.4% (8.37% for those using the extra digit) in June, versus 9.2% in May.

The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact not otherwise published by the BLS.

Gold and Silver Highs

Adjusted for CPI-U/SGS Inflation. Despite another recent all-time high in the price of gold in the current cycle, gold and silver prices have yet to approach their historic high prices, adjusted for inflation. Even with the June 28th historic high gold price of $1,261.00 per troy ounce, the earlier all-time high of $850.00 (London afternoon fix, per Kitco.com) of January 21, 1980 has not been breached in terms of inflation-adjusted dollars. Based on inflation through June 2010, the 1980 gold price peak would be $2,382 per troy ounce, based on not-seasonally-adjusted-CPI-U-adjusted dollars, and would be $7,689 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars.

In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce (London afternoon fix, per silverinstitute.org) has not been hit since, including in terms of inflation-adjusted dollars. Based on inflation through June 2010, the 1980 silver price peak would be $139 per troy ounce, based on not-seasonally-adjusted-CPI-U-adjusted dollars, and would be $447 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars.

As shown on page 22 in the Hyperinflation report, over the decades, the price of gold has more than compensated for the loss of the purchasing power of the U.S. dollar as reflected by CPI-U inflation, while it has effectively fully compensated for the loss of purchasing power of the U.S. dollar based on the SGS-Alternate CPI."

Consumer Metrics Institute: Growth Index Update Vs. US GDP

The relationship between CMI's Growth Index as an indicator of US GDP is interesting. If it continues its correlation the US GDP is in for a serious slump, if not a double dip. The Fed is likely to initiate a new round of quantitative easing in response, although they will try to jawbone their way around the monetization issues.

Growth Index Past 4 Years



The Consumer Metrics Institute's 91-day 'Trailing Quarter' Growth Index -vs- U.S. Department of Commerce's Quarterly GDP Growth Rates over past 4 years. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average.

Consumer Metrics Institute's Contraction Watch



The comparison of the 91-Day Growth Indexes during the 'quarter' immediately following the commencement of a contraction. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average. The contraction events of 2006, 2008 and 2010 are shown against the same scale of annualized contraction.

Charts by the Consumer Metrics Institute

Net Asset Value of Certain Precious Metal Funds and Trusts

The Problem of Unresolved Debt in the US Financial System

Michael David White has painted some dire pictures of the US housing market, but this one is shocking in its implications.



Chart fromA Blistering Ride Through Hell by Michael David White.

I enjoyed the synopsis of this chart that was done by Automatic Earth in Is It Time to Storm the Bastille Again:

"That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333."

Nine out of ten Americans will notice that there is a significant gap that must be closed here. What makes it even more chilling is that the gap is continuing to widen as home prices continue to correct to the mean.

This debt must be resolved. There are two major ways to do it: repayment and default.

Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ' just mail in the keys.'

Straight up default, writing off the debt even through foreclosure, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.

Automatic Earth references an essay which we also had linked here by Eric Sprott called Wither Green Shoots that points out the unfortunate fact that of the 986 bank holding companies in the US, 980 of them lost money last year. The lucky six were the TBTF banks on major government subsidy.

So, where is the government going to liquidate the debt? And what effect will it have on dollar assets when they do it?

The Japanese solution was to ignore their bad debt and insolvent kereitsu, because admitting it would cause significant loss of face, not to mention financial loss, to an elite that does not permit such things to happen. So instead they arranged for their single party LDP system to drag the debt like a ball and chain through what came to be known as 'the lost decade' while they tried to make it go away by export mercantilism and crony monetarism wherein funds were given to the same kereitsu in a remarkably ambitious (and expensively wasteful) series of public works boondoggles.

Do you think the US can follow this path? As if. Japan started from a base as a net exporter with a huge trade surplus and little debt. Scratch that idea.

Someone has to end up 'holding the bag.' And the consumer cannot rise to the occasion, the banks are all insolvent and a sinkhole until they change their business models. So what will be 'the last bubble?' Bernanke has managed to monetize about 1.5 trillion dollars so far. Only 5.5 trillion more to go, if housing prices can stabilize at current levels, and employment return to pre-crash levels quickly.

A few European readers have expressed their relief, and some noticeable pride, that their banking and political system resolved its own debt crisis so quickly and easily. To the extent that their banks are holding dollar denominated financial assets, they have merely stopped the table from shaking for the moment, as their sand castles await the next mega tsunami to come rolling across the Atlantic.

Consider this well, and you will understand what is happening in the economy, and why certain things occur over the next 24 months, despite the fog of wars, currency and otherwise. And bear in mind that the only real limit and effective constraint on the Fed's ability to monetize debt is the value and acceptability of the bond, and the dollar in payment of interest, by foreign debt holders, as domestic debt holders are under legal compulsion by the law of legal tender.

And it was all unnecessary, attributable to the dishonesty and greed of a remarkably small number of men in New York and Washington who managed to rig the markets and the political process, with the acquiescence and support of a public grown complacent and in far too many cases, soft headed and corrupt.

These are the same people, along with their enablers, who are now preaching the virtues of austerity for the many, and free and easy markets for themselves. All gain, no pain. While the game is going it must still be played. Obama has been disappointing, but what comes next may well be worse, much worse.

Bernie Madoff was lying and cheating and taking money until the day he closed his doors.

Perhaps they are in denial, but surely they must hear the footsteps of history approaching. And their bravado is yet another bluff, and hides the rising stink of fear.

Gold Daily Chart, Overhead Resistance, the 50 DMA, and GLD Option Expiry MaxPain

Gold is struggling to overcome some fairly well defended overhead resistance. That much is obvious.

The bullion bears took gold down hard below the 50 Day Moving Average in early July when it was threating to break out through key resistance at 1260, and have been holding it down below that 50 DMA ever since. The price selling is obvious and determined.

Seasonal selling? It does not look anything like selling by motivated investors or actual holders of positions. It does not even look like liquidation under duress.

I think it is more like a trading gambit by the hedge funds, who planned for seasonality in their cross trades with miners and other pairs, and are determined to make it happen. The 50 DMA is a logical place for traders to make their 'goal line stand.'

This could be tied to the option expiration tomorrow in the GLD ETF. This has become a major trading instrument for cross trades in the metal, and is convenient because it has a tenuous relationship to the physical bullion market.

This is important because if it is just hedge funds they are more likely to get stuffed badly and have to scramble to unwind, as compared to a big bullion bank working with the FED, BIS or IMF determined to maintain control of the currency markets.

Gold Spot Daily Chart with 50 DMA



GLD July Options Expiration 'MaxPain'



MaxPain looks like about where it 'should be' going into the expiry.

MaxPain Chart from OptionPain

Why the BIS Gold Swaps Are Important and the Failure to Reform

In his recent commentary, Gold Derivatives Update: BIS Swaps, Reg Howe notes:

"Not surprisingly, revelation of these swaps has generated considerable discussion, comment and analysis by students of the gold market. What appears to have happened is that one or more central banks loaned gold to one or more bullion banks, which then swapped the gold with the BIS for cash, leaving the physical metal in place. Under this arrangement, the accounting conventions promulgated by the International Monetary Fund allow the central bank or banks to continue to count the gold in official reserves while the BIS enjoys a high level of security on the gold side of the swap."

This is how I described the swaps in a July 6 blog entry:

"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 to 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."

Quite a few of the usual suspects and industry bottom feeders have questioned the significance of these swaps, while admitting they do not understand them. So confusing, who would care. Move on, nothing to see here. By the way, strike those nutters off the guest interview lists, and make sure people know that they are persona non grata.

The significance of these swaps seems almost transparently obvious to anyone who is following the commodity markets, but Reg Howe says it quite well, and has been illuminating this smarmy little scheme for several years.

"...an integral part of gold banking in recent years has been the suppression of gold prices, not least by increasing the ratio of paper claims on gold to the underlying amount of available real metal. In this sense, if the new gold swaps disclosed by the BIS are just the latest technique for giving official support to an increasingly shaky gold banking business, they might be viewed as a short-term negative for gold prices. But in a larger sense, the growing reluctance of central banks to part with whatever gold they have left can only be a positive development for committed gold investors."

The point is that some of the central banks, led by the example of the Fed and J.P. Morgan, have been leasing out their gold inventories to the bullion banks at very low rates, without reflecting those leases on their books. Technically this does not violate any prohibitions against selling sovereign assets without the oversight and consent of the people. In the case of Gordon Brown, when you do it, you invoke the secrets act and hide the details as well.

The bullion banks have been selling that bullion into the market, artificially suppressing the price, and occasionally having to be bailed out when there is a short term 'run' on their paper obligations as in the case of the sale of England's gold by Gordon Brown.

The reason, more properly rationale, for this 'arrangement' is the linkage shown in several economic papers, including an important one co-authored by Larry Summers, that leads them to believe that their is a linkage between lower gold prices and lower interest rates on the long end of the curve. I believe they have it wrong and are ultimately mistaken, but they believe it, and that's what counts. And this will be their cover story when they are brought to justice, the Greenspan defense for his own unindicted offenses. I thought I was doing the right thing, but I was mistaken, and I am sorry.

So why should we care? For two reasons. First, this is clearly become a reverse Ponzi scheme, wherein large paper claims exist for a shrinking pool of an available physical resource, ie. central bank and bullion bank gold. The same applies for silver.

The derivatives short positions held by a few banks, like JPM and HSBC, are enormous. If the market ever breaks free of this scheme by the shorts, it is going to leave a crater in the international banking system.

And second, when one has a scheme started from good intentions that gets out of hands and is covered up by official government actions, it festers into corruption. That corruption spreads, and undermines the integrity of the institutions that it involves, namely the Treasuries and Central Banks of many of the developed countries.

"Corruption is a tree, whose branches are
of an immeasurable length: they spread
Everywhere; and the dew that drops from thence
Hath infected some chairs and stools of authority."

Beaumont and Fletcher, The Honest Man's Fortune

Sounds a little crazy huh? The SEC dismissed the whisteblower in the Madoff scandal as a cranks for years.

At least some of the monied interests, the privileged, and their demimonde of enablers have called it such. And yet the evidence keeps coming out and confirming it, little by little. The revelation of the fractional reserve nature of the world's largest bullion exchange was a blockbuster. The Fed resists audits of their dealings in gold, and an independent audit of the gold held by the Treasury and Fed with a full and clear disclosure of any obligations on those inventories has been resisted for years.

Like Enron, the tech bubble, the housing bubble, the Madoff Ponzi scheme, financial deregulation, OTC derivatives, relaxed pension fund rules, and the financial assets bubble, this bullion bank scheme is going to blow up and collapse, and the public is going to be asked to pay the bill, and ignore all the wrongdoing for their own good.

That is why this is important. And there will be hell to pay when the day of reckoning arrives. And that is why there is such moral hazard in the policy of not seeking indictments of key figures in this financial fraud because the perpetrators think they will be able to just keep the scheme going, and then lie and deny if the time of discovery comes, as their fellows have done already.

But it hasn't happened yet. And the pigmen live life on the edge, doing what they will, with a confidence that they can talk their way out of any difficulties that may arise, maybe make a few phone calls, call in some favors from the powerful. They are just that good.

I have known several of that type personally. This is how they think, and their actions follow their beliefs in their own power, and the distance they enjoy from common humanity. This is why deterrence is an even more important factor in intellectual or white collar crimes, because belief in the con is such a pivotal element.

This is what makes Obama's reluctance to take an aggressive stand against fraud, to follow through on the will of the people in their desire for justice, such a fatal flaw. His moral ambiguities and desire to go along respectfully with the desires of the powerful, shown clearly in his appointments and key decisions, makes him a nice guy to pal around with perhaps, but a tragic failure as a leader for reform, and an American president.

And they often have a good run of it. But eventually they have trouble talking their way out of trouble, especially when they are figuratively swinging from a lamp post, or hoist with their own petard.

"Watch therefore and pray always, that you may escape all these things that will come to pass, and be among those standing with the Son of Man.” Luke 21:36

Net Asset Value of Certain Precious Metal Funds and Trusts

Gold Daily Chart and an Elliot Wave Count

This shorter term chart and E-wave from Lannie Cohen of Capitol Commodity Services.

I have provided a short-term chart on gold, which suggests a potential low in place.



In my opinion, even if the low is taken out, it will show positive divergence, which would suggest a buying opportunity, a perfect scenario for the "scale-in" strategy.

Remember, Gold is a currency and is certainly acting as such. The outlook for higher prices into year end remains the same.

"Betting against gold is the same as betting on governments. He who bets on governments and government money, bets against 6,000 years of recorded human history." Charles de Gaulle

SP 500 September Futures Daily Chart

"Niagra Falls. Slowly we turned, step by step, inch by inch..."



As a reminder this is an option expiration week for equities.

The Sprott Physical Silver Trust

Since silver is 'the people's gold' I would expect this trust to be very popular.

This fund has the monthly delivery option as does PHYS for gold.

Presumably the delivery will be in standard silver bars of 1000 troy ounces with a minimum fineness of .999. This is approximately 68.5 pounds avoirdupois. The bar would be worth about $18,280 at today's prices. Presumably there will be some fees involved in delivery. This size is popular with institutions.

This fund could put some stress on the silver bullion market which is already a bit tight by any measure. We assume the prospectus will indicate a negative position on leasing of the fund's silver, and the requirement not to engage in fractional reserve silver bullion.

Of course there need to be explicit auditing standards down to the bullion level to avoid some of the counter party risk appearing in some of the ETFs which deal in subcontracting with passive audits. ETFs are fine for a trade, but if one is buying bullion for insurance against currency risks, then the auditing and allocation issues become rather substantial.

Financial Post
Sprott Has a New Physical Silver Trust
Barry Critchley
Wednesday, Jul. 14, 2010

It has worked for gold plus a number of other metals including molybdenum and uranium -- though it didn't work for copper -- and the hope now for the promoters is that it will work for silver. We are talking about the Sprott Physical Silver Trust, which wants to raise capital via the sale of US $10 units.

As the name suggests, the issuer will use the proceeds to invest in physical silver bullion. "The Trust seeks to provide a secure, convenient and exchange-traded investment alternative for investors interested in holding physical silver bullion without the inconvenience that is typical of a direct investment in physical silver bullion," states the prospectus.

The document offers a number of reasons to invest in physical bullion: It's convenient, all the proceeds will be invested in physical silver; the silver will be stored at the mint and the trust will be able to secure lower transaction costs than investors doing it themselves. But the fund is geared to those who like their income in the form of capital gain; the trust does not intend to pay any dividends.

But one wrinkle is that once a month, unit holders will be able to redeem all or some of their units and receive physical silver. It's not immediately clear why a unit holder would want to do that, other than to provide unit holders with comfort that they can get their hands on the metal...

One reason for the popularity of funds that invest in physical metals is the favourable tax afforded U.S. institutions. The prospectus talks about the capital gains advantages for such buyers: The tax rate is 15% (though it will rise to 20% by year end) on such investments compared with the normal 28% tax rate.

h/t Rodd, aka 'Silverholic'

James K. Galbraith: The Financial System Must Be Reformed

Although I differ considerably from Mr. Galbraith's conclusion that government must take on a larger role financing the reconstruction through the active allocation of capital, I cannot fault his call for a serious reform of the financial system as the sine qua non for a sustainable recovery. Why substitute one version of financial engineering by corrupt politicians for another?

I am pessimistic that this will happen, yet. Although the pigmen feel that they have 'won the war,' and will continue from outrage to greater outrage, until they provoke a reaction, and the people finally rise in their righteous anger.

It has not happened yet, at least successfully. Washington is under siege by an army of lobbyists with cash in hand.

But it is almost a certainty that the pigmen, who think that they have won the war, will go from outrage to outrage, until the people finally rise in their righteous anger. The pigmen cannot restrain, cannot reform themselves even when it is so obviously in their own interests. Such is the instinct of the predator class to insatiable, seemingly obsessive, self-destruction. Enough is never enough.

"Tombé de l'éternel, Satan veut l'infini. Tombé de l'Être, il veut l'Avoir. Mais le problème est insoluble à tout jamais. Car pour avoir et posséder, il faut être, et il n'est plus. Tout ce qu'il s'annexe, il le détruit. Et certes, il pourra tout avoir, puisqu'il est appelé Prince de ce Monde dans l'Évangile - mais il n'aura que ce monde-ci." Denis de Rougemont

"Having fallen from the eternal, the Evil One's desires are endless, insatiable. Having fallen from pure Being, he is driven by the desire to possess, to fill his emptiness. But the problem is insoluble, always. He is compelled to have and to hold, to possess and consume, and nothing else. All he takes, he destroys. Certainly he rules the material, as he is called the Prince of this World in the gospels - but only of the things of this world." And since material things will have an end, he is condemned to a gnawing hunger, and the wages of his pride, oblivion. The is no greater punishment for pure ego. And the knowledge of this is his torment.

"What to do? To restore the rule of law means first a rigorous audit of the banks and of the Federal Reserve. This means investigations. Representative Marcy Kaptur has proposed adding a thousand FBI agents to this task.

It means criminal referrals from the Financial Crisis Inquiry Commission, from the regulators, from Congress, and from the new management of troubled banks as they clean house. It means indictments, prosecutions, convictions, and imprisonments. The model must be the clean-up of the Savings and Loans, less than 20 years ago, when a thousand industry insiders went to prison. Bankers must be made to feel the power of the law in their bones.

How will this help the economy? The first step toward health is realism. We must first stop pretending that bad assets can be made good, that bad loans will someday be repaid, and that bad people can run good banks. Debt crises are resolved when debts are written down and gotten rid of, when the institutions that peddled bad debts are restructured and reformed, and when the people who ran the great scams have been removed. Only then will private credit start to come back, but even then the result of bank reform is more prudent banks, by definition more conservative than what we've had...

The entire host of neglected priorities of the past 30 years should be on the agenda now. That is the way—and the effective path—toward prosperity."

James K. Galbraith, Tremble Banks Tremble

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

Bastille Day 14 Juillet 2010

"The longer we dwell on our misfortunes the greater is their power to harm us."

Voltaire

"Behind every great fortune there is a crime."

Honore de Balzac

"Prejudices are what fools use for reason."

Volaire

Remember, remember...

Gold Daily Chart

This setup resembles the rally off the April low.

If the SP 500 falters at overhead resistance gold will likely remain within its trading range.