Currency Wars Part II

"All war is based on deception. Of all those close to the commander, none is more intimate than the secret agent; of all rewards none more liberal than those given to secret agents; of all matters none is more confidential than those relating to secret operations."

Sun Tzu


"Let Hercules himself do what he may,
The cat will mew, and dog will have his day."

William Shakespeare, Hamlet

There is a currency war underway.

The international trade clearing mechanisms are tottering. Countries are using their economic power, their banks and currencies, as a part of overall foreign as well as domestic policy.

This is a huge source of the tensions and problems which are are seeing both economically and militarily in the world today.

The current trade system based on the US dollar reserve currency is not sustainable. It has had a good long run, but like the euro it has reached the end of its rope. The US cannot continue to print enough money and increase its debt balance through trade any further. See Triffin Dilemma. Yes I am familiar with Eichengreen's counter argument.

And I am also aware of the already written and vetted proposals for a 'single world currency' with independent local governments,  an arrangement which is even more fallacious and ill founded than the euro.  Yes I know that there could be a series of agreements that could kick this down the road five or ten years.   But something has got to give.  The charade is getting a bit thin but the deception must go on.

I still think the only tenable solution, if one still wishes to cling to the notion of 'free trade' internationally, is an SDR based on a wider basket of currencies with a gold and silver component.  And I am of the opinion as you know that much of these international theatrics and sword hammering is just the 'negotiations' phase with regard to the composition of the new SDR, and the ownership of its maintenance.

There are some who would treat the dollar as an arm of the military strategy, but that becomes a bit dramatic, in the Dr. Strangelove sense, but is nevertheless a good source of Defense Department consulting fees for those who promote the idea.

And I would hope that it goes without saying that the currency war is intimately tied in with the oil/energy situation, via the petrodollar. If you are going to send your country into multiple preemptive wars, one might take the time to understand the reasons why they are doing it. It is about the oil, and the positioning for it.

The problem is that there is no mechanism in place to bring the disputing parties together for an expedient resolution, given their conflicting interests. And those interests run deep, particularly for the Anglo-American banking cartel in NY and London. The dollar is the basis of their power.

And so we are locked in a 'currency war,' a resolution of differences in interest by other, less destructive, means than war itself. After all, nine-tenths of diplomacy is economic, if money is power.

If this notion is alien to you, then one can sympathize, because it is like watching an opera in a foreign tongue without a libretto to help you to understand the action on the stage. To have such knowledge of the basic plotline might not only help your understanding, it could be good for your investment portfolio.  For in this currency war, your accounts and your savings are cannon fodder.

If you wish to read one pivotal post on the subject read the first part of this: Currency Wars.

If you click on the label 'currency wars' at the bottom of this post, it will bring up all the other posts here that touch on that subject, some admittedly only tangentially.

I think the currency war will intensify quite a bit before it resolves.  I have been tracking this since 1999.  It is the reason I first became interested in gold.  I went looking for something like it, and only gold really fit, and to a lesser extent silver.

Gold and silver are intimately involved in the unfolding currency war, because they take no sides, and have no counterparty risk.  No one can print them.  And this is why I think GATA is right, not because of the evidence they have, which is more substantial than one might suspect given obsessive secrecy and the disinformation campaigns, but because it is exactly what one would do if there was to be a currency war, and such things as gold and silver existed.   It is basic strategy of war:  seek to control the high ground.  And along with oil, gold and silver are strategic high ground in a currency war.  And the first victim in a war is the truth.

If one does not understand these things, and the scope of what is happening with the dollar and the euro, then the significance of the important things that are happening will be missed and dismissed.  People will connect the dots that they see and draw their pictures accordingly and they will be wrong. And what is particularly Machiavellian is that some of that is being done by intent.

And even with all sorts of technical trading knowledge, one will be in the dark, literally be fighting 'the last war,' in their understanding of what is happening in the world as it is today.

Net Asset Value Premiums of Certain Precious Metal Trusts and Funds

GTU must be a difficult borrow, since it maintains a robust premium during an obviously calculated raid on the metals.  It is thinly floated as these things go, and there are no options on it that I can find.

Subsequently I am told there are no shares available for borrow by several brokers.  Whether this is a general condition everywhere I do not know.

The financial firms obtain a number of Sprott shares from the underwritings. This can be used for the borrow game, and are probably subject to leverage and naked shorting at that given the condition of the shorting and clearing in these equity markets.

More On the German Gold Reserves Controversy - Where Is the Gold?

"Another amusing incident arose from the fact that the Reichsbank maintained a not inconsiderable gold deposit in the Federal Reserve Bank in New York.  Strong was proud to be able to show us the vaults which were situated in the deepest cellar of the building and remarked:

'Now, Herr Schacht, you shall see where the Reichsbank gold is kept.'

While the staff looked for the hiding place of the Reichsbank gold we went through the vaults.We waited several minutes: at length we were told:

'Mr. Strong, we can't find the Reichsbank gold.'

Strong was flabbergasted but I comforted him. 'Never mind: I believe you when you say the gold is there. Even if it weren't you are good for its replacement.'"

Hjalmar Schacht, Autobiography: Confessions of 'The Old Wizard',  p.245

Is history rhyming once again?

One can only hope not so fully, as the central banker Schacht later became an integral part of a notoriously despicable regime after the fall of the Weimar Republic.

And if the gold is misplaced or otherwise preoccupied, is the Fed still 'good for it?' Perhaps not, in these times of rather tight and multiply allocated physical supply.

At least the German people are beginning to hold their politicians and bankers accountable, unlike their Western counterparts.

What has been hidden will be revealed, and what has been secret will be brought to light.

The Associated Press
Unease About Germany's Unchecked Gold Reserves
By Juergen Baetz
October 22, 2012

BERLIN (AP) — Germany’s central bank has failed to properly oversee the country’s massive gold reserves, which have been stored abroad since the Cold War in case of a Soviet invasion, independent auditors say.

The central bank must renegotiate its contracts to gain the right to inspect its gold bars, which are worth tens of billions of dollars and are stored in the United States, Britain and France, the Federal Auditors’ Office said in a report to lawmakers obtained by The Associated Press on Monday.

The report says the gold bars ‘‘have never been physically checked by the Bundesbank itself or other independent auditors regarding their authenticity or weight.’’ Instead, it relies on a ‘‘written confirmations by the storage sites.’’

Most of Germany’s gold reserves — some 3,400 tons worth an estimated $190 billion at current rates — have been kept in the vaults of the U.S. Federal Reserve, the Bank of France and the Bank of England since the postwar days, when Berlin worried about a possible land war with the Soviet bloc.

The auditors maintain that the central bank must be able to at least inspect samples of its gold bars in regular intervals to verify their book value.

The report acknowledges that such inspections might be logistically complicated, but it stresses that ‘‘this cannot discharge from the necessity to carry out an inventory.’’

The central bank said in a reaction to the report that was also sent to lawmakers Monday that it sees no reason for a physical inspection of the bars. ‘‘There is no doubt about the integrity of the foreign storage sites in this regard,’’ it stated.

The debate on most of the gold reserves being held by foreign authorities has caused some inevitable conspiracy theories questioning their very existence, but several German politicians have also voiced unease.

Philipp Missfelder, a leading lawmaker from Chancellor Angela Merkel’s center-right party, has asked the Bundesbank for the right to view the gold bars in Paris and London, but the central bank has denied the request, citing the lack of visitor rooms in those facilities, German daily Bild reported.

Given the growing political unease about the issue and the pressure from auditors, the central bank decided last month to repatriate some 50 tons of gold in each of the three coming years from New York to its headquarters in Frankfurt for ‘‘thorough examinations’’ regarding weight and quality, the report revealed.

An initiative backed by some German economists, industry leaders and a few lawmakers dubbed ‘‘bring home our gold’’ launched in May has attracted some 10,000 supporters online so far.

But Finance Minister Wolfgang Schaeuble and others maintain that there is no reason to worry.

‘‘I currently have no doubt about the stock and the storage of the gold reserves,’’ said Priska Hinz, the opposition Greens top lawmaker on the budget committee. ‘‘I do not doubt the reliability of the foreign central banks,’’ she told the AP.

Several passages of the auditors’ report were blackened out in the copy shared with lawmakers, citing the Bundesbank’s concerns that they could compromise secrets involving the central banks storing the gold.

The report said that the gold pile in London has fallen ‘‘below 500 tons’’ due to recent sales and repatriations, but it did not specify how much gold was held in the U.S. and in France. German media have widely reported that some 1,500 tons — almost half of the total reserves — are stored in New York.

GATA had this to day about that last paragraph concerning the decline in the amount of gold held in London for Germany.

"So despite the lack of official announcement, Germany lately has been selling gold from London -- perhaps as part of the secret "strategic activities" grudgingly acknowledged two years ago by the Bundesbank to GATA's friend, the German financial journalist Lars Schall.

The lack of announcement of the sale of the German gold in London suggests that the sale was actually part of a gold swap with another central bank -- like the New York Fed.

That is, the powerful implication here is that German gold in London was sold at the behest of the United States and in exchange Germany took title to United States gold vaulted in the United States -- or title to gold supposedly vaulted in the United States. This way the Bundesbank could continue to claim ownership of the same amount of gold without lying, at least not technically."

Gold Anti-Trust Action Committee, German gold report reveals secret sales that likely were part of swaps

Gold Daily and Silver Weekly Charts - Gold Tags the Handle Target of 30% - Germany's Gold

Last night gold broke down to tag our 30% correction objective (about 9 PM EST) which is just shy of 1710 spot, and then turned around and moved higher. Gold and silver were actually reasonably resilient most of today even as stocks moved lower led by the SP.

There was a rather interesting story in Der Spiegel today, reporting that a Federal Court has ordered the Bundesbank to undertake thorough audits of German gold, including the gold held in London and New York.  They may bring back 50 tonnes or so to verify it more closely.  Rechnungshof fordert Inventur der Goldreserven. Here is a translation courtesy of my friend Peter.

Der Spiegel
BundesbankRechnungshof demands inventory of the gold reserves
22 October 2012

Berlin - Germany's gold is safely kept in Central Bank vaults in Frankfurt am Main, New York, Paris and London. Apparently, nobody has verified that. The German General Accounting Office has now demanded a regular review and inventory of the huge gold reserves abroad by the Bundesbank.

The Auditors justified this in a report to the Budget Committee of the Bundestag on Monday citing the "high value of the gold reserves". The German gold reserves stored at other banks have never been audited by the Bundesbank itself, or by other independent auditors, that is, "physically tabulated and with their authenticity and weight verified." Indeed, numerous conspiracy theories abide on the topic -- the US gold reserves in Fort Knox were taken a long time ago.

The Bundesbank has, after the United States, the second largest gold reserves in the world. At the end of 2011 it was 3396 tons worth 133 billion euros. After the soaring of price of gold, it should be realistically even about 142 billion euros. The gold bars are kept by the Bundesbank in safes in Frankfurt am Main and three storage places abroad: at the US Federal Reserve (Fed) in New York, the French National Bank in Paris, and the Bank of England in London.

Bundesbank is retrieving tons of gold from New York

The Court of Auditors has to ascertain, on behalf of the Bundestag, whether the Bundesbank is precisely scrutinizing the gold it is storing abroad. It is controversial whether the practice by the Bundesbank for years is sufficient, to only rely on a written confirmation as to the gold bars by the foreign central banks.

The Court of Auditors therefore recommends that the Bundesbank negotiate a right to the physical examination of stocks with the three foreign banks. With the implementation of this recommendation the Bundesbank started according to the report. Also the bank has decided in the next three years to bring to Germany 50 tonnes of gold these from the Fed in New York, to make a detailed examination here. The report contains speculation in several passages. So is not clear from the paper, how much gold is exactly stored at which foreign Central Bank.

The bullion held at the Bundesbank headquarters consist of 82.857 bars, mostly stored in sealed containers with 50 bars each, which, according to the report, are kept in four separately sealed safes. A part of them (6183 ingot) are outsourced in the so-called gold Chamber being stored on open shelves in a separate safe. To secure the gold, according to the report: "The safes external shutter is double, the internal closures and the gold Chamber is under a triple lock. "

So what next? That's all anyone ever wants to know.

The handle target was touched in the overnight, but a few more tests to 'set it' would not be unlikely. And recall that a drop below that target is not a big deal, unless you are short term and highly leveraged, unless the spot price should happen to drop below the 50% correction level.

So let's see what happens.

SP 500 and NDX Futures Daily Charts

Stocks were wobbly after Catepillar came in with a weak revenue report, although that stock remarkably enough was up on the day.

Stocks reached a low in the early afternoon, led by the SP 500, and then rallied back to a gain on the day. Gold and the NDX never broke so there was the 'tell.'

So what next? Let's see how the debate goes tonight since some people seem wound up about that, and what new earnings reports this week may bring.

The Great Depression in Ten Pictures

Some of these slides are from my previous blog site, when I was considering some of the policy decisions and data from the first Great Depression in the US. This study was from 1999 to 2001. It was fully fleshed out in my mind by Bernanke's (in)famous essay of 2002, The Fed Has a Printing Press. That pretty much cleared the air for me on the future investment path for gold.

Although I do not list it here, you may also be interesting in the posting, Why the Feds Seized the Gold in 1933. The purpose was to devalue the dollar AND to use the proceeds to recapitalize the banks that were remaining after the FDR bank holiday.

Since the US is not on a gold standard now, the Fed has no need for the gold. It can expand its balance sheet with a few keyclicks, as long as that is their policy decision. Any wide scale confiscation of private property at this point would be purely gratuitous and rather unlikely, recent hysteria not-withstanding.

The plunge in the stock market was 90% into its trough.  The initial decline was made much worse by the austerity that Hoover and his Treasury Secretary Mellon pursued.   

This is a busy chart but it shows the interplay of several key metrics.  In particular, it shows the disaster that is austerity in response to a financial credit crisis such as we are seeing today.

This is the kind of result produced by austerity.  There is a lot of misery in this chart until 1933 when Roosevelt took a more modern approach combining monetary and fiscal actions.  The increase in unemployment in 1938 was a direct result of the premature tightening of the Fed as can be seen on their balance sheet slide a few charts below.

Roosevelt's policies got the American economy back on track.  It was a sound marriage of monetary and fiscal policy.   What made it sustainable was the financial reform, the settling of the banking system, and the emphasis on jobs and growth in the median wage.

The Fed kept expanding the balance sheet into the 1938 period when they prematurely drained reserves out of a fear of inflation and triggered another recession.  That was a clear policy error and can be seen as clear as a bell on this chart below.

Perhaps this chart is what gave Bernanke the idea for 'Operation Twist.'  If so, he is fighting the last war.

Look at those real interest rates.  No wonder the country almost ground to a standstill.  The Fed and the Hoover Administration, particularly Treasury Secretary Mellon, ought to have been ashamed of this policy error.   The action of Roosevelt in 1933 in breaking the dollar against gold and recapitalizing the banks after shutting down the weak ones, and substantial investigation and reforms, did the trick.

The Smoot-Hawley Tariff was enacted on 17 June 1930.  Exports had already been plunging before that because when demand goes slack in a deep recession both imports and exports tend to drop with demand.  I think some of the rhetoric surrounding the issue of global trade in this case is nonsense.  In the Great Depression tariffs did not matter because no one was really standing as the buyer of last resort.  And if the tariffs went into effect in the middle of 1930, they certainly did not have an untoward impact on imports relative to the plunge in exports, again due to prevailing economic conditions.  Notice that net exports remain largely flat throughout the period.   To state this more precisely, the negative effects of Smoot-Hawley are vastly overstated by globalist advocates.  

 

Here is what the real exports and imports figures looked like until 1939.  Again, it is economic recovery and aggregate demand that makes all the difference.   Until tariffs are outsized and predatory, one-sided if you will, they will have much less impact than real economic growth.  And do not overlook the currency devaluation of the dollar to gold in 1933.

Personal Consumption along with Government Program spending and the currency devaluation were obviously factors to the real recovery in GDP especially since it did not come from net exports.  As can be seen from other slides in this series the dip in GDP in 1938 was due to the Fed's draining reserves by increasing bank reserve requirements out of a misplaced fear of inflation.

Greg Smith And Goldman Sachs

"Ad hominem (also called personal abuse or personal attacks) usually involves insulting or belittling one's opponents in order to attack their claims or invalidate their arguments, but can also involve pointing out true character flaws or actions that are irrelevant to the opponent's argument. This is logically fallacious because it relates to the opponent's personal character, which has nothing to do with the logical merit of the opponent's argument."

I have not been following the Greg Smith story closely, although I was aware he had resigned from Goldman quite publicly, and had read the op-ed which he wrote as his fare thee well. There is nothing in there that was surprising to those who follow the financial fraud on Wall Street.   It was actually fairly mild compared to the widely ignored information obtained by the Levin committee.

What was new was that a Goldman employee was saying it, and Goldman is the most highly politically connected of Wall Street Banks, in the US and in Europe.

But the absolute trashing and personal attacks on Greg Smith in the past week that were orchestrated by Goldman and supported, heavily, by the US financial networks got my attention. Generally ad hominem attacks are used by those who consider the facts of the case to be dangerous ground, and wish to do anything that they can to avoid discussing them. So instead they seek to discuss the person bringing them to light.

The 'news channels' do have not spent much time discussing what Greg Smith is saying, but instead turn their focus to discrediting Greg Smith personally as a loser, a fool, a person who was naive to be surprised by the ruthless predatory culture on Wall Street.  He was disgruntled because he did not get a raise, and so has an ax to grind.

The media are working from the talking points memos released by Goldman, and a growing cultural disposition against whistleblowers as being inherently disloyal malcontents.

The rationales in favor of Goldman quickly take on the character of the schoolyard.  Everyone does it on Wall Street, and singling out Goldman isn't fair.  And what was Greg Smith expecting?  Everyone knows Wall Street is predatory and will do whatever it takes, even abuse their customers and make millions out of it. And if the customers are dumb enough to fall for it, they deserve it.  Don't be a fool like him, be a sophisticate and move along.

What people do not realize is that the fraud cuts so deep and wide that it hard to escape it, even if one has no dealings personally with any of these firms.   These Wall Street financiers have their hands in everyone's pocket through the manipulation of the financial system, the price discovery mechanisms, and the money supply.  And if you do not understand this by now, you understand nothing.

For me the takeaway, that gets lost in the color coverage, is that the efficient markets theory is nonsense, and that self-regulation does not work when such enormous sums of money are at stake.  The answer is ultra-transparency and effective regulation, particularly to rein in the financial cowboys who can use money to game and control the political, judicial, and analytical processes of society. 

And I do not see any way to accomplish this except to separate commercial and investment banking, and ring fence the activities of the investment banks and speculators, and prohibit them from selling anything except exchange vetted products to any public institution such as a retirement fund.

I was amused by the comparisons of Greg Smith to a 'rat' who breaks the laws of omerta in the Mafia.

This is the theater that passes for 'news' in the corporate media who are live streaming the American Hunger Games.  May the odds be ever in your favor, especially when you are constantly rigging the game.

Here is Greg Smith's first public interview on US television.