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The reason for dropping of the sell orders and associated derivative bets, lifting of gold into the oxygen depletion zone, with a subsequent series of bear raids, is obviously in honor of the September options expiration this week on the Comex, and the Jackson Hole speech of Mr. Bernanke regarding the Fed's next steps on currency debasement.
But for those who were looking for a margin increase, do not despair. We forget that there is a new kid on the block. Eric McWhinnie at the Wall Street Cheat Sheet reminds us that:
"The prior sharp selloff was seen on August 11. This is significant because the CME increased gold margins by 22%, effective after the close of business on August 11. The same beat down method seen in silver months earlier, was seen in gold. However, gold recovered quite well until yesterday’s sharp selloff. So what caused this familiar selloff in gold and silver? Another margin hike!
Late Tuesday, it was announced that The Shanghai Gold Exchange increased gold margins for forward contracts, the second time this month. Li Ning, an analyst at Shanghai CIFO Futures said, 'Gold prices on the global market have been rallying strongly and at an increasingly faster pace. The margin hike is a pre-emptive move in case prices crashed and caused great volatility in the market. The Shanghai Futures Exchange could raise margins on its gold futures contract soon too.'”
I doubt very much that the Shanghai forwards increase caused this pullback. More likely Shanghai saw the setup for this week as I did last week, and sought to protect itself.
But nonetheless it is a good reminder that this is not your father's gold market anymore, with new players and exchanges entering the game, but perhaps it will be more like your great-grandfather's gold market over time.
This too shall pass. The tune may change, but the fundamentals remain the same. Banking cartels do not create wealth; they can merely attempt to confiscate and redistribute it, as stealthily as possible. And therefore bullion is their enemy since it forces them into the open.
I found this email from a reader to be very interesting, and I asked him for permission to share it with you.
Most students of economics are aware of the tendency of 'perfect competition' to zero economic profit over time, unless there is a continual renewal and reinvention of the business, under the guidance of a wise, insightful, and responsive management. Even the best enterprise involves a risk of loss, the expense of well paid employees, and significantly hard work, all combined with a bit of luck. Little wonder that a minority of businessmen find this arrangement less satisfactory that other alternatives, which unfortunately includes various forms of cheating, if not outright fraud.
And therefore there is a constant tendency of participants in capitalist systems to foster the unreasonable profits of cartels and the stable pricing power of monopolies, natural or otherwise, with a measure of discretionary control over resources and choices, legislation and information, and political and monetary power.
Corporations are creatures of the law, and inferior to it. Without it, they don’t exist. What better way to create the supreme monopoly and maintain it in perpetuity than to skew the law in one’s favor?
When corporations obtain an inordinate amount of power over the social fabric of regulation and governance, the creation of an oligarchy distorts the real economy through the accumulation of too much power in too few hands, in the manner of the central planning bureaucracies of the old line communist nations.
And this is why the standard economic solutions of both stimulus and austerity for normal cyclical excess can be doomed to failure, as they are at this time. The system itself has become distorted and broken, and is badly in need of reform. Whatever one puts into it will come out badly, and be turned to fruitless purposes, corrupted by the unprecedented concentration of power in the hands of the few, the partnership of the Wall Street banks, big media, multinational corporations, and their servants in the government.
The hallmark of a corrupt enterprise is that while it has the power to confiscate and destroy, it cannot create sustainable organic growth and recovery that benefits the broader public.
The modern, somewhat romantic theory of naturally efficient markets peopled by inhumanly rational and altruistic individuals is a fairly modern twist on the noble savage ideal of Rousseau, and just as other-worldly and impractical when applied to a modern society. Certainly no one who has driven recently on a modern highway in rush hour could believe it.
The corrupting tendencies of the concentration of power is an intriguing idea, with an historical resonance from the trust-busting Teddy Roosevelt, and his distant cousin Franklin, as well as the famous observation of Lord Acton:
"And remember, where you have the concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that."
Nineteenth century Americans viewed the business trusts as un-American "internationalists, and heartless, abusive exploiters of the public interest." And rightly so. They looked for relief to the reform of their government, and the power of democracy and the law.
This struggle of the individual to maintain a balance of power with the organizations, whether they be the corporation or the state, is a recurrent theme, a continuing saga throughout human history. Big Government and Big Business have both been inimical to human freedom.
Whether such an accumulation of power in a few hands is achieved by the gun and star chamber, or the pen and the bribe, may not matter to the end result, which is a society plagued by corruption, stagnation, and at its end, a growing instability with a resort to physical force and more overt repression on its own people.
Central Planning - It's not Just for Communists Anymore
By Matthew K
23 August 2011
Vancouver, BC
It's been a rough few weeks for the capitalist system, which bestrides the globe like a teetering colossus. Not only has there been stock market turmoil worldwide, and the temporary threat of a US default on its debts, but an esteemed, mainstream economist suggested that Karl Marx was right. In the Wall Street Journal, no less! Karl Marx Was Right
That would be Nouriel Roubini, whose claim to fame came from timely warnings about the US housing bubble and subsequent US stock market collapse.. It is important to note that he only said that Marx was right in that capitalism could collapse on itself, not that it actually would.
Most people are familiar with the spectacular failures of central planning in the Communist regimes. According to the resurgently fashionable Austrian school of economics, an economy is too complex to be managed by one expert, or even one committee of experts, regardless whether the clubhouse door reads "Politburo" or "Shark Tank."
According to the Austrians, society's fastest path to prosperity consists of allowing every person to decide freely what is in their best interest, with the emphasis on individual transactions.
A biological analogy comes from flocks of birds, schools of fish, and ant colonies, among others. These swarms function extremely well, despite being composed of simple creatures following simple rules, and despite the anarchic lack of a leader directing things. Our own "simple critter rules" in modern society are probably along the lines of "try to get a higher paying job, and pay lower prices for stuff, within the laws of the land, and without making too many enemies."
A business analogy comes from Toyota. Their quality went from hopeless to fearsome by training every employee to be competent enough to figure out how to do their own job better, and then allowing them to do so. If their management tried to dictate how each task was to be done, they might have peaked at early-80’s American car maker quality levels.
In a similar way, they decided not to try to predict the right production levels for each model, colour, and trim. Instead they pre-built enough cars to fill dealership inventory, and each time a customer purchased a vehicle, they would build one more of that same model, colour, and features. In economic nerd speak, they responded to that "market signal". So if 5% of Corolla drivers wanted a green car with deluxe extras, in the long run 5% of Corolla production would consist of deluxe green vehicles.
Since the flaws of central planning and benefits of distributed decision-making occur in the public sector, the private sector, and even in biology, we can generalize that the USSR's economic problem was ultimately that a small group of people would decide how to (mis)allocate most of the country's resources.
In the past thirty years, there's been an immense concentration of wealth -- particularly in Anglo-American countries (the US, UK, us, the Aussies). The US is at the leading edge of this trend, with the top 1% owning 42% of the wealth, or about six times as much as the bottom four fifths of the population, and a significant portion of the means of production and public information (media) and influence over the course of society.
In recent decades Western capitalism has moved towards the central planning model of a relatively small number of people in charge of directing the allocation of resources. This narrowing of perspective has in turn led to policies progressively more disastrous for the moved and the shaken... which was the Soviet denouement.
I have to credit the influence of the thoughtful blog of a well-to-do American entrepreneur and military strategist, and especially this particular posting. Central Planning and the Fall of US Empire
Capitalism's path back from the self-perpetuating central planning will require a more equitable, or at least a less inequitable, distribution of wealth and power, by which to rebuild the middle class and promote decision making based on individual choice and a more widely based entrepreneurial meritocracy. Which is what Roubini was complaining about, in saying that too much wealth was being redistributed from labour to capital.
It would be a terrible irony if Marx was proven correct, and unchecked capitalism destroyed itself by evolving the self-crippling features of a centrally planned communist economy. One can only hope that we can reform our current market systems before things get worse.
Gold was lifted into the oxygen depletion zone above $1,900 overnight, and as predicted, the bear raids were launched today in force, together with nonsensical commentary from the financial demimonde.
"...the market in physical gold is tiny, and largely comprised of nutcases."
No wonder the Anglo-American financial cartel is in such decline. Blind is the arrogance of faded empire, when it can no longer succeed by telling their client states what to do.
And of course the television spokesmodels were able to cite the overnight peak and say, "Wow, strap on my seatbelt. Gold is down $60!" Better rush into the rock solid safety of equities. Here are a very nice selection of stocks for you, at recently marked down prices.
Yes, they really are that obvious.
So what next? Gold and silver will probably be subject to additional bear raids as the Comex expiration is not until Thursday the 25th, and Bernanke will be speaking from Jackson Hole on Friday the 26th.
This does not yet have the feel of the May option expiration silver smack down, with its serial margin increases by the Exchange. The gold market has a strong underlying bid now with Venezuela repatriating its gold, and strong buying by non-Western nations and their central banks.
There is a currency war underway, and the primary bone of contention is the nature of the world's reserve currency and fiat based international trading regime. There are ancillary issues of course, but the position of the US dollar, the petro-dollar if you will, as the world's reserve currency is key.
The biggest risk to Venezuela is not in transporting the gold. It is the counter party risk, of obtaining the return of their sovereign property from the Anglo-American banking cartel.
"As mentioned in previous quarterlies, the main long-term risk is that after two massive bubbles and two equally massive resurrection programs, the Fed may be out of ammunition.
Should more building blocks fall and a serious global double-dip develop, then the pattern of market behavior this time may be more historically typical. That is, instead of quickly recovering, markets will become cheap and stay below long-term averages for several years as was the case pre-Greenspan."
Jeremy Grantham
A big technical relief rally in stocks despite some very poor economic news, earthquakes and an approaching hurricane, lol.
The market was on support and deeply oversold. Yesterday was the 'stutter step' at support that indicated they were going to try and take it back up today no matter what. And so they did.
All eyes on Jackson Hole. I doubt Benny will roll anything out of significance, but some jaw-boning is de rigeur.
There is no economic recovery for people, just corporate people.
Bear raid right on schedule for Comex option expiration week, after they ran it up to the stratosphere.
Look out for Thursday expiration and Friday when Benny will be expected to say something on the easing front.
A wild day in the markets today as stocks came in much higher and then tanked, with the CDS spreads on Bank of America running much higher along with gold and to a lesser extent silver.
Financials pressed the SP 500 lower all day, and Goldman broke hard to the downside into the close as a story on Reuters suggested that Lloyd Blankfein had hired a white collar criminal defense attorney named Reid Weingarten.
On Friday Bernanke will be speaking at Jackson Hole, and the markets are looking for some indication of the latest subsidy to the markets from the Fed. If not a flat out QE3, then perhaps Benny will speak about a program to control the longer end of the yield curve.
All this uncertainty had investor flocking into the safe haven of gold sending it to the 1890's. This has been a brutal rally for the metals bears.
This Thursday the 25th is the option expiration on the Comex. I have to admit that I am concerned that gold has been allowed to rise up into the oxygen depletion zone here, as had been done with silver not all that long ago, and that applications of bear raids and margin increases will bring it tumbling back down to support.
I wouldn't try and get in front of this comet, because we are not quite sure what is driving it. Chavez' margin call on the Bank of England's gold could be triggering this parabolic run. It would nice if gold consolidated its gains soon. I am playing the markets defensively for now.
Let's see what happens.
A very volatile day on Wall Street as stocks came in higher from the overnight trade, but then lost their early gains and dipped much lower led by the Bank of America which is rumoured to be in trouble.
Stocks recovered their losses to be almost unchanged, but a late breaking story from Reuters quoted a 'government source' that Goldman Sachs CEO Lloyd Blankfein has retained an attorney, Reid Weingartern, from the White Collar Criminal Defense group at Steptoe and Johnson. Goldman plunged more than 5 percent on the news.
The action may be related to a subpoena received from Justice regarding the Carl Levin report, and possible perjury charges. Lloyd Blankfein is a Harvard Law School graduate himself, and is reputed to have a very smart legal mind. He could be acting out of an excess of caution. It is hard to imagine the Obama Justice Department actually DOING anything to any of the pampered princes of Wall Street.
Once again the markets are near the pivots and key support levels. Most likely a big move is hidden somewhere in the cards.
I like this graphic for several reasons, but especially because it puts everything in proportion with regard to the US' current obligations.
One thing I would like to highlight is the large surplus funds in the Social Security Trust and others. These were 'invested' in a special type of intra-governmental Treasury note.
These funds are not 'gone' anymore than a Treasury bond is 'gone.' It is a sovereign debt holding. If the US defaults on its debt, then it defaults. But let's call it what it is.
The Trust Funds are not the money that the government 'owes to itself.' It is a Trust fund, that is, money held by the government in Trust for others. The Trustees invested it in a special category of Treasury bonds that do not trade on the open market.
So to somehow suggest that Social Security is bankrupt now because the government spent the funds on general obligations is to assert a violation of Trust, a fraud, and a selective default on the sovereign US debt.
And do not think that the world would view it any other way, despite the spin put on it by faux economists, useful idiots, and mainstream propagandists for the money men.
Where would you think they would put a Trust Fund of this size? In a passbook savings deposit account? Federal Reserve Notes? The stock market? It was given to the government to be invested in bonds that were judged to be the least risky form of storing that wealth.
No, the real problem is that the US has malinvested too much of its revenue in too many fruitless and unfunded projects like wars, overseas military bases, and other subsides to oil companies, banks, and multinational corporations. The partnership between the money men, their corporations, and the government has allowed corruption to grow and prosper.
The money men and their cronies directed the peace dividend into their own pockets. And now that hard times have come, they wish to not only keep their gains but multiply them, and visit hardships on the very people whom they have defrauded. Their greed and hypocrisy knows no bounds.
"Adversity makes men; prosperity makes monsters."
Victor Hugo
The US trade deficit and the stagnant real wage are major unaddressed problems, and has been so for the past twenty years. And those are the result of the distortions of fiat money regimes.
Reform and domestic growth is the answer to the US and UK problems, and not further looting and economic pillage of the laboring classes to provide largesse to the money men and paper manipulators.
