By Captain Hook, Treasure Chests
That’s what the stock market is right now more than anything else in terms of importance – it’s a culture of complacency and corruption (from last week) that is perilously addicted to the Fed’s liquidity. And I am certainly not the only one voicing concern in this regard, where you will find a recent interview with Mark Faber attached here on this subject addressing the root of this problem, which is of course the Fed’s increasing inflationary policies. Within this interview, Faber discusses how Bernanke’s misplaced policies targeted at lifting real estate prices is failing miserably, and that this inflation is making it’s way into other essential commodities having price supportive demand / supply dynamics (think food, fuel, etc.), which is of course lifting prices in these areas just when an ongoing negative wealth effect in the sectors where people have most of their savings continues unabated. As Faber points out in no uncertain terms, and as usual, Fed policy is failing miserably (which is known to other Fed Presidents), and that this failure will have unexpected and profound consequences, not the least of which will undoubtedly include ‘general price instability’ eventually. (i.e. contrary to the Fed’s primary mandate these days.)
As you may know, Bernanke is not one to take failure sitting down however, and has now began to expand the Fed’s daily monetization practices (and effectively its mandate) to include not just the bond markets, but stocks now as well. So it’s no wonder speculators are becoming dangerously complacent these days, with the Bernanke put in the market every day propping up prices. One does need to wonder just what extent Banana Ben intends to take his monetization practices however, where as you may know, like a junkie, in doing so he has now set US markets on a ‘crash course’ in one way or another, where he either keeps increasing the dosage (potentially triggering shades of hyperinflation), or the stock market fails too, adding to the list of Fed failures. Unfortunately the junkies don’t realize this, and continue to play in the markets assuming the Fed (Banana Ben) will keep feeding their worsening habits. This, is of course a recipe for disaster no matter what happens, where the deciding factor looks like it will be the bond market, with both foreign fringe (to the core) economies and the muni-bond market in the States continuing to unravel at alarming rates.
Why is this observation important? Answer: Because short of what might produce shades of hyperinflation in undesirable sectors (again think food, fuel, etc.), Bernanke will be forced to either ramp up monetization practices further, or risk not just the muni-bond market imploding, but Treasuries as well; which again, as per our opening, will continue to play havoc in real estate, and likely stocks eventually too (think flash crash) when Murphy’s Law decides to kick in. So, it’s important to realize that because of Banana Ben’s increasingly dangerous monetization experiment, which will also be written up in the text books to his dismay and shame, that both the broad bond and stock markets are ‘accidents waiting to happen’, with all the ingredients (sentiment, technical, contagion risk, etc.) for crashes now in place. That’s right, we are just waiting for the trigger(s) to be pulled, and as long-time readers of these pages know (they know the importance of open interest put / call ratios [no other sentiment system predicted this rise in stocks]), that could be as early as this week (a January top) with options expiry removing put related support from the major US indexes.
Yes, but isn’t the monetization alone enough to lift stock prices independent of this? Answer: Unless Banana Ben is willing to buy up the whole market once the selling starts, in my estimation the answer to this question is no. That’s why you don’t start something like this in the first place. More recently (circa 1997) Hong Kong authorities tried this, and when the currency crisis hit in ’97, stocks collapsed under adverse conditions. And while this scenario will likely not repeat here, still, something else will happen to trigger the selling (think options expiry), like Steve Jobs medical leave popping the Apple bubble, and then it’s all over for the speculation game for some time once again. (i.e. think 2-years plus.)
To cloud the waters however, we have had US price managers come down on precious metals quite hard since the beginning of the year, this while stocks have been squeezed higher making the manipulation obvious. Unintentionally then, US price managers have succeeded in creating a downside buffer for themselves in that precious metals are now short-term oversold on the dailies, and due for a bounce, which should act to support the broads as well because surface dwellers will take this as an inflation signal. So, as suggested above, this confusion could support general price levels in volatile fashion in coming months, where precious metals (the mania de jour?), like tech stocks in the year 2000, may not top for the present sequence until March.
And while I don’t for a minute think such a top in precious metals would be the ultimate full blown mania top, because public participation rates are still too low, at the same time some degree of exhaustion at that time (March) would provide an alignment within the larger inflation trade enabling all equity groups to decline in unison, just like they did on the upside via the dollar’s ($) depreciation. Furthermore, as you will see below, while the dailies and weeklies might allow for a rally at this time, least we forget this does nothing for the monthlies, which at extremes, and poised to turn lower. And again, with stocks never this overbought previously in history, eventually (by March at the latest), this should be enough to roll over the entire inflation trade.
Until then however, and as the British would say, the bureaucracy’s price managers have made a ‘right proper mess’ out of maintaining synergy within the inflation trade, which is the whole idea in keeping the speculators both confused and taking stupid risks. This morning’s trade profile is perfect example of what you can expect over in weeks to come with options / oversold related strength in precious metals being used to lift the entire equity complex after trapping a bunch of unsuspecting speculators in short positions yesterday off the Steve Jobs news. They can do this because don’t forget the open interest put / call ratio profile (attached above) for precious metals in the ETF’s and indexes is supportive of prices, so the price managers will use this to squeeze prices higher this week, which as postulated above, will be used to support the larger equity complex. (i.e. hence the turn around in stock futures overnight.)
Of course some think that if the bureaucracy’s price managers can stick handle gold down into ETF and index options expiry with open interest put / call ratios as high as they are, it’s conceivable they might get their negative monthly close as well. Martin Armstrong discusses the various support levels in gold (and more) attached here. According to him, he thinks a negative monthly close below $1372 would pause gold on an intermediate basis, but me, I’m not so sure in this regard. As you know from the above, I’m still looking for one more rally into late winter / early spring before an intermediate degree correction sets in. And if I had to pick a target, Fibonacci resonance related resistance just above $1500 remains the possible goal, with Mother Nature exerting her inexorable draw to this level through time. (See Figure 1)
You will remember from previous discussions on the subject that Fibonacci resonance related projections is a high confidence targeting methodology, which in gold’s case, and as can be seen above, would involve the channel breakout holding support and then surging to the target. Along these lines it should be noted if this occurs, that it’s a less frequently successful sequence except in very strong markets. And so from this we can conclude the move(s) in precious metals should remain bullish as long as this channel breakout in gold is maintained. If it fails, which is what I expect to happen as summer approaches, then a trip all the way back to the bottom is possible, putting gold back down into the $1100 area, and possibly lower. The count and sequencing shown below on the monthly plot from the Chart Room support this thinking, where we are in the throws of finishing up 1 of Primary (minimally) C right now with technical indicators now at the tops of their respective ranges. (See Figure 2)
And if you think precious metals shares are not long-term overbought in some measures, just take a look at the MACD of the Amex Gold Bugs Index (HUI) monthly plot pictured below, where again, as you can see it’s at the top of it’s range and apparently turned lower. This is why monthly closes in the sector could prove important here in January, given because the establishment systematically suppresses precious metals, when viewed in the larger scheme of things, any downside moving forward should be viewed as mild. Moreover, with physical supplies of precious metals so low at present, which is a condition likely to get nothing but worse, this should always be in the back of your mind, that any weakness in gold and silver should prove temporal even if other asset categories begin to implode. (See Figure 3)
At the same time however, one should also notice that while stochastics also appear to be rolling over, other indicators displayed show just how lack-luster this past rally in precious metals has been, and that when the stars become aligned once again, more gains should be expected. Further to this, just look at the weekly HUI / Gold Ratio plot below, where while prices could definitely fall further, RSI for example is already down in the low 40’s and vexing support, suggestive that under the right conditions a bounce is in order. So, while prices could remain soft for a period of time while the larger equity complex corrects (whatever you call it), eventually the future for precious metals should appear bright on a sustained basis, not just because they get squeezed into options expiry again. (See Figure 4)
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. Along these lines, you should know your subscription to Treasure Chests would include daily commentary from either the myself or Dave Petch. As you may know, I cover macro-conditions, sector timing, and value oriented stock selection, while Dave covers the HUI, XOI, USD, SPX, and TNX technically each week. Mr. Petch is a world class Elliott Wave Theory technician.
In addition to this, you would have access to all archived commentaries, the Chart Room, exhibiting 100 annotated charts of the precious metals and stock markets, along with stock selection and sector outlook pages. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented ‘key’ information concerning the markets we cover.
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Good investing and best of the season all.
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 18th, 2011.
Copyright © 2011 treasurechests.info Inc. All rights reserved.
Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.
Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute “forward-looking statements” with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.
By James West, MidasLetter.com
It is only human to seek reasons for optimism, and to find comfort in self-delusion. “You’re going to be just fine,” is probably one of the most frequent lies told among family members when serious injury or illness occurs. We have to believe we’re going to be “just fine”, because the alternative is too painful, and painfully unacceptable.
However, when the tendency towards delusion overshoots mere comfort and interferes with the potential effectiveness of a remedy, a brisk slap across the face is occasionally required to exorcise the delusion and let the healing begin.
Such is the case with the global economy and its top leadership. The obsession among Ben Bernanke, Timmy Geithner, and Barack Obama in convincing Americans the storm is over and the rainbow is imminent are thoroughly preventing the corrective influence of unfettered markets from bestowing their therapeutic effect upon us. Only gold, not U.S. dollars, can fill the pot at the foot of the rainbow. They need a good smack across the face to get this through their stubborn little pointed heads.
Japan just got a nice resounding smack across the face from Moody’s. Downgrading the debt of the proud and massively self-conscious Japanese is more like a smack across the face after pulling their pants down in public. I’ve got that nation on suicide watch for the time being.
In Egypt, Tunisia and Yemen, the citizens of those nations are administering a very energetic smack across the government face by rioting, and demanding an end to tyranny and injustice. The grass roots, unorganized and spontaneous nature of the social conflagration is testimony to its origin in the honestly aggrieved and tormented national soul. The smoke from those fires carries the scent of revolution, and threatens to ignite the entire region.
England has just recorded a year of negative GDP growth, or more accurately, a year of GDP contraction. There is no ‘perception management’ program in place among the admirably pragmatic Brits. Things are not good, and they clearly have embraced the idea that happy phony touchy-feely is unacceptable. They’re going to solve the problems by rolling up their sleeves and tackling the credit-spawned imbalances head on. But there’s just one problem.
These damn American elitist leaders and their obsessively inward facing narcissism is hindering the process. The non-stop and accelerating circle-jerk of Fed buying Treasuries so they can write checks and spew dollars into the economy has created the illusion of recovery, based on the selective presentation of certain data, that, taken on their own, might be indicative of economic resuscitation. But analyzed in the context of broader economic events and circumstances, they are merely numbers generated by numbers, and against the larger negative economic factors, are irrelevant. It’s the global economy that’s choking on U.S. dollar driven asphyxiation, and Moody’s is threatening the requisite slap with a downgrade.
This is the spread of the sovereign debt crisis from the European fringe to the globalized mainstream. It’s a cancer that’s spreading, even while these idiot pseudo-Americans harp on about recovery and growth and hijack Davos turning into an après-ski circle jerk glee club.
I tell you I’ve never been prouder to be Canadian. When the real Americans catch the whiff from Egypt and start a little war dance of their own to end the tyranny and oppression of the elitists who have stolen democracy, liberty and justice from the populace, a smack across the face administered from within its own borders shall be imminent. That day is coming…you can just smell it.
Among the irrefutable proof that the economic recovery is a complete and treasonous lie are the following facts:
Unemployment continues to spread;
Consumer prices are rising;
Foreclosures are still mounting;
Home prices are still dropping;
The United States Government is broke.
Here’s how that lie is being morphed into the apparent economic recovery and becoming amplified and broadcast to the erstwhile anesthetized American public:
1. The U.S. Federal Reserve and the United States Treasury, effectively two departments within the administration of the national fiscal management branch of the government, fabricate, out of thin air, trillions of U.S. Dollars, and then give them to the nations biggest financial institutions.
2. These institutions then take these counterfeit dollars, and inject them into commodities markets by establishing hundreds of thousands of derivative contracts both long (betting the future prices rises) and short (betting the future price falls). The losses are rolled over into new contracts, and the wins cashed in and the contracts rolled up. With no position limits, no transparency, and no rules, the recycled losses build and build and build and now sit at some $600 trillion??
3. The money fabricated from nothing becomes more money fabricated from nothing in the form of profits. The profits are reported as earnings (fabricated from nothing) generating positive numbers in the stock market (that mean nothing). All this in an effort to confuse you, the consumer, investor, and saver, into continuously working to generate real wages increasingly worth nothing thanks to this system, and abiding the law while they use your delusion to concentrate control of the world’s assets into ever narrower and centralized control.
Lets put it another way. Lets say, you work for me, and I pay you in popcorn, which you can use to trade for things like rice and corn and steak and cheerios and gas, because the popcorn has been accepted as a medium of trade, thanks to the stupendous marketing efforts of the central popcorn bank and the popcorn treasury, for over a century. Popcorn used to represent a certain amount of gold or silver or both but that system was just too dumb and didn’t make sense and so now popcorn just represents popcorn. Its easy to pop, and everybody likes it.
But suddenly, one day, I start paying you less popcorn, and at the same time, it takes more popcorn to buy the staples of life. Your family’s economy crumbles, and suddenly your son can’t go to soccer games (cause that takes popcorn and everybody knows, popcorn doesn’t just grow on trees), and little Tina can’t go to ballet, cause that takes more popcorn, and all the while, on TV and on the movies, everybody has all the popcorn in the world and they’re all dressed well and healthy and beautiful, and in the news, the popcorn economy is improving. Popcorn, it would seem, is the be-all and end-all of life. But popcorn can’t buy happiness, can it?
Suddenly, the popcorn fed and popcorn treasury announce that hey!. We’re just gonna pop more popcorn, cause that’s what we need. So the popcorn goes into the economy from the popcorn bowls at the top of the food chain, and suddenly there’s streets being paved, and new signs going up, and it starts to look and feel like things are gonna be okay, because the popcorn market, coincidentally is showing that certain sectors of the NYPE (New York Popcorn Exchange) are improving in earnings, and that’s driving the NYPE higher.
Popcorn is buying incrementally less, but there seems to be so much popcorn around…just that you can’t really seem to get your hands on any. But they keep popping popcorn, but more and more of your friends are finding they’re popcorn salaries aren’t cutting the mustard and they’re being turfed out onto the street.
Popcorn popcorn everywhere. Golly. Why then, with all this popcorn around, are things going so sideways on the real world spreadsheet groaning under the increasing weight of the national debt? Why Japan, who has more popcorn out than anybody, just got officially reclassified as an economy that maybe shouldn’t have so much popcorn invested into it. Maybe they can’t repay their popcorn obligations to the popcorn generating countries that keep lending them more popcorn. You could say, they’re choking on their own popcorn.
This is the biggest Ponzi scheme of all time, the most popular con in history. Lets call it PopCon, so it has the slick marketing-oriented anagram that gives it a nice sound and imparts the mantle of respectability.
Despite the popularity of the concept of ‘too big to fail’ among bankers and economists in the diseased economies, the simple truth is, nothing is too big to fail, and perpetual growth is impossible. Any future predicated on perpetual growth is bound to fail. The perpetual growth strategy guarantees that.
Does anybody in Davos know this? And if they do, does anyone have the cojones to say it? And if they do, do they have the political capital to effect the changes that would defer this inevitability and reverse it?
I don’t see anyone. All I see are a bunch of theoretical economists and straw captains paying way, way, way too much for a ticket into the biggest nincompoop club in the world. Davos is just an international forum to strategize the next stage of PopCon.
A Coordinated Assault on Gold and Silver
The proof of a collusive and covert assault on the gold price is cobbled together strictly from circumstantial evidence. The massive build-up of short positions, and the cancellation of thousands of long contracts by the cartel of JP Morgan, HSBC and others is a signal to real bullion investors that such an attack is underway, and long investors dutifully proceed to the sideline while this perennial fraud-in-progress unfolds.
The withering of CFTC resolve into vague policy action items for the future since Bart Chilton’s comments expressing unequivocal conviction of market manipulation is proof of the influence of the banks over government policy. That this assault is mounted on such a coordinated basis is evident in the peculiar headlines and attention of CNBC, CNN, the Wall Street Journal and other elitist controlled mainstream financial media outlets proclaiming the abandonment by investors of gold as evidence by the “sharpest drop in the gold price in weeks.” at the outset of 2011. That has hardly occasioned such a uniform response that unanimously confirms the end of the gold bull market in the past, considering the see-saw rise of gold from $300 an ounce to $1440 an ounce at the end of 2010.
Another highly suspicious behaviour in the gold market is despite what should be highly highly gold positive events, i.e. the sudden breakdown of order in the middle east (normally sending investors flocking to gold), the downgrade of Japan’s debt to AA- (a signal of spreading sovereign debt deterioration) and the U.S. record deficit combined with Treasury needing to go cap-in-hand to ask congress for clearance to borrow more money. AND Moody’s threat to downgrade U.S. debt. These factors manifesting themselves together in 2006 would be enough to send gold soaring, but that reaction is completely absent. What gives?
The lawsuits brought by GATA and the silver traders are proceeding, and the news outlets prefer to speculate on the demise of the gold market instead of focusing on growing fiduciary delinquency of the country’s leadership. I’m sorry but does America not understand that it is now a fascist regime in the purest sense of the concept? What’s happening in Egypt right now could easily erupt in the United States if they don’t revise their self-image. Law and order is eroding in the United States and the grievances of the Egyptians closely mirror those of increasing numbers of Americans.
The time for plastic surgery is over. Radical bypass surgery is needed to resuscitate the U.S. economy meaningfully. The authors of the concept of regime change are closer to falling victim to their own design then they clearly understand.
With the publication of the Financial Crisis Inquiry Commission’s report, unprecedented evidence pointing to preferential treatment of certain of the largest (too big too fail) institutions by government employees should theoretically catalyze a veritable armada of class action lawsuits. The American public has the ultimate opportunity to apply and keep up the pressure on the failed democracy and suspension of constitutional rights catalogued in this document.
And since the commission has further pledged to publish boatloads of raw data and evidence, the U.S. is in a superb position to attack the anti-American banking and government criminal group in the courts, in the press, and spread the message through social media that the jig is up, and its time to demand in the most vociferous yet peaceful way, in the American tradition, an end to the current regime. New laws are required that decisively (not just optically) divorce banking from government. Banks should not be consulted in any way when drawing up legislation designed to isolate an admittedly predatory and opportunistic industry from stealing the homes and jobs of ordinary American citizens.
Egypt may be a world away, but its grievances are shared, on a growing basis, by increasing numbers of Americans, and the collapse of the U.S. economy under an insupportable debt load is at hand. Abandoning dollars for gold and silver (for Americans) or more stable currencies (Canada, New Zealand, Australia, Norway, Switzerland) as an interim measure is the only defense the average American with any assets or savings left has.
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By Chris Vermeulen, TheGoldAndOilGuy
We have seen some exciting moves in the market and with the market sentiment so bullish it should make for a sharp selloff in the coming weeks. Meaning everyone is overly bullish and owns a lot of stocks and commodities; therefore the market should top and leave them holding the bag while the smart money runs for the door. The market will not bottom until all of these individuals holding the bag finally cannot take the pain of losing any more money and once we see them panic and sell them all at once only then will we be looking to go long again.
The past couple weeks I have been bombarded with emails asking if gold and silver have bottomed and if they should be buying more on these pullbacks. Those of you reading my work for the past few months know that my analysis clearly has shown how both gold and silver have been topping out. There have been strong distribution selling and price patterns on the charts are also clearly signaling a top was near.
A couple weeks ago I posted an important report covering gold, silver and the US Dollar and where the next big moves will be. Well it’s time for another update on Gold, Silver and the Dollar as they have come a long way from my last report.
Take a quick 15 second look at Part One charts: http://www.thegoldandoilguy.com/articles/precious-metals-and-the-dollar%E2%80%99s-next-big-move/
Ok let’s move on to today’s charts…
Silver Daily Chart
Silver has formed a very nice looking top and it is now trading under its key moving averages. It is also currently testing a key resistance level after Friday’s bounce on the back of fears in Egypt. Unless something happens internationally I figure silver sill continue its trend down.
Gold Daily Chart
Gold futures are doing the same as its little sister (silver). I feel the general public is still very bullish on metals and before we see higher prices (new highs) the market will have to shake the majority out of their positions first. At this time gold looks like it should test the $1285 level. Depending on how long it takes to get there and the price action it forms in the following days that outlook could change but expect sellers to step in at the $1350-1355 area.
US Dollar 2 Hour Chart
The dollar has been grinding lower the past two weeks forming a falling wedge reversal pattern. It’s also important to note that on the daily chart the dollar tested a key support level last week. This should be an interesting week for the dollar and the rest of the market simple simply because when the dollar makes sharp movements it pushes the price of stocks and commodities around in a big way.
I am looking for a multi week rally in the dollar possibly longer but with small pauses or corrections along the way.
Pre-Week Metals and Dollar Trend Analysis:
In short, I feel gold and silver are nearing a short term resistance level and will find selling pressure in the coming days only to continue on their journey down for a few weeks. The dollar on the other hand broke out of its falling wedge on Friday and could have a strong rally for 2-3 days. I feel most traders and investors have been shorting the dollar for two weeks straight, so once they realize it’s going higher there will be a ton of short covering and the dollar should rip higher.
This shift in the Dollar from down to up has a direct effect on the SP500 and subscribers of my newsletter are going to take full advantage of these next big moves in the market.
If you would like to get my daily trading analysis and trade exactly what I am trading please join my newsletter here: http://www.thegoldandoilguy.com/free-preview.php
Last week was an eventful week at home and abroad with several events directly showing up in the performance of global markets and the price of gold. On Friday, Egypt’s mayhem in the streets caused uncertainty in the markets, but sent gold shooting up over $21 to close at $1,336.75.
On Wednesday, a continuation of the Federal Reserve’s easy monetary policy pushed gold up double-digits. Earlier in the week, a small hedge fund that had overleveraged itself to gold futures blew out its position, causing the biggest ever one-day reduction in futures contracts for the Comex.
This small hedge fund trader fell victim to one of the oldest flaws in capital markets—arrogance with excessive leverage. This is the same infallible, overleveraged attitude that took down Fannie Mae, Lehman Brothers, Long-Term Capital Management, Enron and a number of Main Street American Home Buyers who leverage themselves 100-to-1.
By overleveraging his small $10 million fund, he was able to control the equivalent of South Africa’s annual gold production, according to the Wall Street Journal. That’s one small fund controlling an amount of gold equal to the world’s third-largest producer?
Leverage of this magnitude is impossible to manage, no matter how intelligent the investor. However, danger and crisis can equal opportunity for long-term investors. All these events have created a lot of short-term noise but not derailed the long-term story.
Life is about managing expectations and that’s why we educate investors to anticipate before they participate by studying the DNA of volatility inherent in different asset classes.
As I mentioned in my Frank Talk blog earlier last week, gold is far less volatile than other commodities such as oil, copper and other metals. In fact, gold’s volatility has been less than domestic equities over the past several years.
This table shows the rolling one-month, three-month and 12-month volatility for gold bullion, the S&P 500 Index and the XAU. You can see that the average one-month price movements for both the S&P 500 and gold are roughly equal over the past five years.
When you go further out on the time horizon, gold’s volatility shrinks when compared with the S&P 500. For a one-year period, the average volatility for gold bullion has been 28 percent less than the S&P 500 over the past five years.
I’ve included gold stocks in the table because it illustrates the leverage you get with gold equities versus the bullion. As you can see, the ratio has roughly been 2-to-1 over the past five years for all three time periods. This means that if gold goes up 2 percent, then gold equities typically move up 4 percent, and vice versa on the downside.
That is close to what we’ve experienced so far this January with gold prices and the XAU slipping 7.52 percent and 12.26 percent, respectively.
Long-term gold investors must remember that we have been here before. Remember that gold is always being driven by the fear trade and the love trade. During weeks like this, the fear trade gets most of the media coverage, especially when a country like Egypt implodes because roughly 30 percent of the world’s oil travels through the Suez Canal, according to Dahlman Rose. The story is much bigger and more complex.
The fear trade drivers are negative real interest rates and deficit spending to support social welfare programs. This chart from Clusterstock shows how the U.S debt ceiling has risen to unprecedented levels. Since the mid-1980s, the U.S. has raised its debt ceiling hand-in-hand with the country’s economic growth, even faster in some cases.
Meanwhile, the Federal Reserve reaffirmed last week that real interest rates will remain negative for the long haul. The Congressional Budget Office (CBO) has set the deficit estimate for 2011 at $1.5 trillion. The only thing keeping gold prices from skyrocketing has been money supply, which has been slow to rise. However, money supply in emerging economies is well above the G7 levels.
Governments in the developed world, not just the U.S., have a long-term spending problem. Will they address their fiscal deficit spending on social welfare by making serious cuts or will they try to reflate their economies, devalue their currencies to stimulate exports or raise taxes to an extent they choke economic activity? Whichever way, it should be a positive for gold. Bottom line, it is prudent to have some exposure to gold in a diversified portfolio.
As I have said in the past, the other side is the love trade, gold jewelry demand in emerging economies is rising and remains the biggest component of the demand equation. India’s gold imports were up roughly 46 percent in 2010 and China’s nearly 500 percent. Overall global jewelry demand was up 10 percent in 2010, according to the World Gold Council.
As long as both the love trade and the fear trade are intact, gold will remain attractive.
The correction in gold appears to be over for the reasons cited above. We’re near the 200-day moving average which is a key psychological support level.
On Friday, Richard O’Brien, the CEO of Newmont Mining, said he expects gold to reach $1,400-$1,500 per ounce in 2011. The head of the world’s second-largest gold producer also added that he could see gold hitting $2,000 in the future because of rising demand from emerging markets and a hedge against inflation.
P.S. Evan Smith and Brian Hicks contributed to this commentary. Also, for more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.
Stay Focused Gold Investors originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
The Cheviot Asset Management Sound Money Conference
The Guildhall, London
Thursday, January 27, 2011
Most Americans will believe almost anything if it’s said with a British accent. I’m not here to ask you to return the favor, but rather to consider some evidence, to be receptive to questions, and to start asking some questions of your own.
In September 2009 Jim Rickards, director of market intelligence for the Omnis consulting firm in Virginia, was interviewed about the currency markets on the cable television network CNBC. Rickards remarked: “When you own gold you’re fighting every central bank in the world.”
That’s because gold is a currency that competes with government currencies and has a powerful influence on interest rates and the value of government bonds. This was documented in an academic study published in 1988 in the Journal of Political Economy by Lawrence Summers, then professor of economics at Harvard, future U.S. treasury secretary, and Robert Barsky, professor of economics at the University of Michigan — a study titled “Gibson’s Paradox and the Gold Standard”:
This close correlation among gold, interest rates, and government bond values is why central banks long have tried to control — usually suppress — the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power.
As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it. Because gold is the vehicle of escape from the central bank system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government.
Of course what Jim Rickards said about gold was no surprise to my organization, the Gold Anti-Trust Action Committee. To the contrary, what Rickards said has been our premise for most of our 12 years, and we have documented it extensively. But while the gold price suppression scheme is a hard fact of history, it is seldom mentioned in polite company in the financial world. So it is a thrill for me that everyone here today is being so polite.
How have central banks tried to suppress the price of gold?
The gold price suppression scheme was undertaken openly by governments for a long time prior to 1971.
That’s what the gold standard was about — governments fixing the price of gold to a precise value in their currencies, a price at which governments would exchange their currencies for gold, currencies backed by gold.
Though the gold standard was abandoned during World War I, restored briefly in the 1920s, and then abandoned again during the Great Depression, that was not the end of government efforts to control the gold price. Throughout the 1960s the United States, Great Britain, and some of their allies attempted to hold the price at $35 per ounce in a public arrangement of the dishoarding of U.S. gold reserves. This arrangement was known as the London Gold Pool.
As monetary inflation rose sharply, the London Gold Pool was overwhelmed by gold demand and was shut down abruptly in April 1968. Three years later, in 1971, the United States repudiated the remaining convertibility of the dollar into gold — convertibility for government treasuries that wanted to exchange dollars for gold. At that moment currencies began to float against each other and against gold — or so the world was told.
In fact since 1971 the gold price suppression scheme has been undertaken largely surreptitiously, seldom acknowledged officially. But sometimes it has been
acknowledged officially, and with a little detective work, still more about the price suppression can be discovered.
You may have heard GATA derided as a “conspiracy theory” organization. We are not that at all. To the contrary, we examine the public record, produce documentation, question public officials, publicize their most interesting answers, or their most interesting refusals to answer, and sometimes litigate to get information. I’d like to review some of the public record with you.
The official records
The gold price suppression scheme was a matter of public record in January 1995, when the general counsel of the U.S. Federal Reserve Board, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee’s minutes, that the U.S. Treasury Department’s Exchange Stabilization Fund had undertaken gold swaps. Gold swaps are exchanges of gold allowing one central bank to intervene in the gold market on behalf of another central bank, potentially giving anonymity to the central bank that wants to undertake the intervention. The 1995 Federal Open Market Committee minutes in which Mattingly acknowledges gold swaps are still posted at the Fed’s Internet site:
The gold price suppression scheme was again a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: “Central banks stand ready to lease gold in increasing quantities should the price rise.” That is, Greenspan contradicted the usual central bank explanation for leasing gold — supposedly to earn a little interest on a dead asset — and admitted that gold leasing is all about suppressing the price. Greenspan’s admission is still posted at the Fed’s Internet site:
Incidentally, while gold advocates love to cite Greenspan’s testimony from 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important. For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.
The Washington Agreement on Gold, made by the European central banks in 1999, was another admission — no, a proclamation — that central banks were working together to control the gold price. The central banks in the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that explanation, it was still collusive intervention in the gold market. You can find the Washington Agreement and its successor agreements at the World Gold Council’s Internet site:
Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. That is when Barrick filed a motion to dismiss Blanchard & Co.’s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase, for rigging the gold market.
Barrick’s motion claimed that in borrowing gold from central banks and selling it, the mining company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick’s confession to the gold price suppression scheme is posted at GATA’s Internet site:
The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. “Foreign currency reserve assets and gold,” the Reserve Bank’s report said, “are held primarily to support intervention in the foreign exchange market.” The Reserve Bank’s report is still posted at its Internet site:
Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005.
There are five main purposes of central bank cooperation, White announced, and one of them is “the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.” White’s speech is posted at GATA’s Internet site:
Two years ago a remarkable 16-page memorandum was found in the archive of the late Federal Reserve Chairman William McChesney Martin. The memorandum is dated April 5, 1961, and is titled “U.S. Foreign Exchange Operations: Needs and Methods.” It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. Amazingly, this plan for rigging the currency and gold markets remains on the Internet site of the Federal Reserve Bank of St. Louis:
In August 2009 the international journalist and provocateur Max Keiser reported an interview he had with the Bundesbank, Germany’s central bank, in which he was told that all of Germany’s gold reserves were held in New York. That interview is posted at the YouTube Internet site:
Some people saw the Bundesbank’s admission as a suggestion that Germany’s gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. The Bundesbank quickly replied to Kirby by e-mail with a denial of Keiser’s report, but the denial was actually pretty much a confirmation:
“The Deutsche Bundesbank,” the reply said, “keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This,” the Bundesbank continued, “has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities.”
The Bundesbank did not specify those “gold activities” and those “trading centers.” But those “activities” can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market, perhaps at the behest of others — like the United States, the custodian of German gold.
A few weeks ago the German journalist Lars Schall, at GATA’s urging, pressed the Bundesbank for clarification about the German gold reserves, and particularly about whether the Bundesbank had undertaken gold swaps with any U.S. government agency. Schall sent the Bundesbank 13 questions. But the Bundesbank brushed him off, even as it seemed to acknowledge meddling surreptitiously in the gold market:
The Bundesbank replied:
“In managing foreign reserves, the Bundesbank fulfils one of its mandated tasks as an integral part of the European System of Central Banks. We trust you will understand that we are not able to divulge any further information regarding this activity. Particularly with respect to the confidential nature of information about where gold holdings are kept, we are unable to go into any greater detail concerning exact locations and the quantities stored at each of these. Likewise, owing to the strategic nature of the activity, we are not at liberty to provide you with more detailed information about gold transactions.”
In 2009 a New York financial market professional and student of history, Geoffrey Batt, posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market.
The first was a long cable dated March 6, 1968, sent by someone named Deming at the U.S. Embassy in Paris to the State Department in Washington. It has been posted at the Zero Hedge Internet site:
The cable described the strains on the London Gold Pool, the gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.
The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince investors “that there is no point anymore in speculating on an increase in the price of gold” and “to establish beyond doubt” that the world financial system “is immune to gold losses” by central banks.
The cable recommended creation of a “new reserve asset” with “gold-like qualities” to replace gold and prevent gold from gaining value. To accomplish this, the cable proposed “monthly or quarterly reshuffles” of gold reserves among central banks — what the cable called a “reshuffle club” that would apply gold where market intervention seemed most necessary.
Of course these “reshuffles” sound very much like the central bank gold swaps and leases of recent years.
The idea, the cable says, is for the central banks “to remain the masters of gold.”
Also disclosed in 2009 by Zero Hedge’s Geoffrey Batt was a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool. This too has been posted at the Zero Hedge Internet site:
The CIA memo said that to keep the dollar strong and prevent “a major outflow of gold,” U.S. strategy would be:
“– To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other.”
“– To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down.”
The third declassified U.S. government document published by Geoffrey Batt at Zero Hedge in 2009 may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and against gold and that gold would be free-trading.
The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Gerald Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold. It has been posted at GATA’s Internet site:
Burns tells the president: “I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt” — that’s Helmut Schmidt, West Germany’s chancellor at the time — “that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce.”
Burns adds, “I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price.”
While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was written 36 years ago.
But there is a contemporaneous admission of U.S. government intervention in the gold market. It has come out of GATA’s long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that has been denied to GATA on the grounds that it would compromise certain private proprietary interests. (Of course such a denial, a denial based on private proprietary interests, is in itself a suggestion that the U.S. gold reserve has been placed, at least partly, in private hands.)
Responding to President Obama’s declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps.
Of course both requests were denied again. But through its Washington lawyer, William J. Olson (http://www.lawandfreedom.com), GATA brought an appeal of the Fed’s denial, and this appeal was directed to a full member of the Fed’s Board of Governors, Kevin M. Warsh, formerly a member of the President’s Working Group on Financial Markets, nicknamed the Plunge Protection Team. Warsh denied GATA’s appeal but in his letter to our lawyer he let slip some stunning information:
Warsh wrote: “In connection with your appeal, I have confirmed that the information withheld under Exemption 4″ — that’s Exemption 4 of the Freedom of Information Act — “consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”
So there it is: The Federal Reserve today — right now — has gold swap arrangements with “foreign banks,” and the public and the markets must not be permitted to know about them.
Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators who had inquired of the Fed on our behalf, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. has engaged in gold swaps:
But now the Fed has admitted such arrangements, if only inadvertently.
GATA subsequently sued the Fed in U.S. District Court for the District of Columbia to gain access to the documents involved. That suit is pending.
Central banks are out of control
There is a reason for the Fed’s insistence that the public and the markets must not know what the Fed is doing in the gold market.
It is because, as the documents compiled and publicized by GATA suggest, suppressing or controlling the gold price is part of the general surreptitious rigging of the currency, bond, and commodity markets by the U.S. and allied governments; because this market rigging is the foremost objective of U.S. foreign and economic policy; and because this rigging cannot work if it is exposed and the markets realize that they are not really markets at all.
This should not be so surprising. For intervening in markets is what central banks do.. They have no other purpose. They’ve just gotten out of control.
Central banks often admit intervening in the currency markets, buying and selling their own currencies and those of other governments to maintain exchange rates at what they consider politically desirable levels. Central banks admit doing the same in the government bond markets. There is even evidence that the Federal Reserve and Treasury Department, through intermediaries, have been intervening frequently in the U.S. stock markets since the crash of 1987.
You do not have to settle for rumors about the “Plunge Protection Team,” the President’s Working Group on Financial Markets. Again you can just look at the public record.
The Federal Reserve injects billions of dollars into the stock and bond markets every week, on the public record, through the major New York financial houses, its so-called primary dealers in federal government bonds, using what are called repurchase agreements and the Fed’s Primary Dealer Credit Facility. The financial houses thus have become the Fed’s agents in directing that money into the markets. As GoldMoney’s James Turk notes, the recent rise in the U.S. stock market matches almost exactly the money funneled by the Fed to the New York financial houses through repurchase agreements and the Primary Dealer Credit Facility — devices of “quantitative easing.”
Meanwhile, for years the International Monetary Fund, the central bank of the central banks, has been openly intervening in the gold market by threatening to sell gold and then finally selling some, or at least claiming to have sold some. The IMF said its intent in selling gold was to raise money to lend to poor nations. This explanation was ridiculous on its face, though the IMF has never been challenged about it in the financial press. No, the financial press has been happy to tell the world that central banks that lately have effortlessly conjured into existence, out of nothing, fantastic amounts of money in many currencies could find a little money to help poor countries only by selling gold.
Of course the intent of the IMF and its member central banks was not to help poor countries but to intimidate the gold market and control the gold price.
Just as Lars Schall recently tried to get some useful information out of the Bundesbank about its gold reserves, in April 2008 I wrote to the managing director of the IMF, Dominque Strauss-Kahn, with five questions about the IMF’s gold. I copied the letter to the IMF’s press office by e-mail, and quickly began to get some replies from one of its press officers, Conny Lotze. But they were all evasive or refusals to answer. Exactly where is the IMF’s gold and who controls it? The IMF wouldn’t say:
Lately central bankers often have complained about what they call “imbalances” in the world financial system. That is, certain countries, particularly in Asia, run big trade surpluses, while other countries, especially the United States, run big trade deficits and consume far more than they produce, living off the rest of the world. These complaints by the central bankers about “imbalances” are brazenly hypocritical, since these imbalances have been caused by the central banks themselves, caused by their constant interventions in the markets to prevent the markets from coming into balance through ordinary market action lest certain political interests be disturbed.
Yes, when markets balance themselves they sometimes do it brutally, causing great damage to many of their participants. The United States enacted a central banking system in 1913 because for the almost 150 years before 1913 the country went through a catastrophic deflation every decade or so. Central banking was created in the name of preventing those catastrophic deflations.
The problem with central banking has been mainly the old problem of power — it corrupts.
Central bankers are supposed to be more capable of restraint than ordinary politicians, and maybe some are, but they are not always or even often capable of the necessary restraint. One market intervention encourages another and another and increases the political pressure to keep intervening to benefit special interests rather than the general interest — to benefit especially the financial interests, the banking and investment banking industries. These interventions, subsidies to special interests, increasingly are needed to prevent the previous imbalances from imploding.
And so we have come to an era of daily market interventions by central banks — so much so that the main purpose of central banking now is to prevent ordinary markets from happening at all.
By manipulating the value of money, central banking controls the value of all labor, services, and real goods, and yet it is conducted almost entirely in secret — because, in choosing winners and losers in the economy, advancing infinite amounts of money to some participants in the markets but not to others, administering the ultimate patronage, central banking cannot survive scrutiny. As has been noted by U.S. Rep. Ron Paul, the Federal Reserve, an unelected agency of the government, has come to appropriate and spend far more money than Congress itself does.
Yet the secrecy of central banking now is taken for granted even in nominally democratic countries.
Now that Paul, an immensely informed critic of the Fed, has become chairman of the House subcommittee on monetary affairs, there may be some devastating public inquiries into central banking. But what a hundred years ago in the United States was called the Money Power is still so ascendant that it sometimes even boasts of its privilege. What other agency of a democratic government could get away with the principle that was articulated on national television in the United States in 1994 by the vice chairman of the Federal Reserve, Alan Blinder? Blinder declared: “The last duty of a central banker is to tell the public the truth.”
Official gold data is disinformation
Government’s largely surreptitious agenda in the gold market is greatly assisted by the widespread falsification of gold reserve and market data. Gold is the worst understood financial market in part because most official data about gold is actually disinformation.
Years ago GATA disclosed that the International Monetary Fund, the leading compiler of official gold reserve data, allowed its member nations to count gold they had leased, gold that had left their vaults, as if it was still in their vaults. The effect of this accounting fraud was to deceive the market into thinking that central banks had much more gold left to bomb the market with than they really did.
But that’s only the start of the false data.
In April 2009 China caused a sensation by announcing that its gold reserves had increased by 76 percent, from 600 tonnes to 1,054 tonnes. For the previous six years China had been reporting to the IMF only 600 tonnes. Had China acquired those 454 new tonnes only in the last year? Very unlikely. Most experts believe that China acquired those 454 new tonnes over at least several years, largely by purchasing the production of China’s own fast-growing gold mining industry. So for as many as six years the official gold reserve data about China was way off.
Last June the World Gold Council reported that Saudi Arabia’s gold reserves had increased by 126 percent, from 143 to 323 tonnes, just since 2008. That the world’s oil-exporting superpower had made such a new commitment to gold in its foreign exchange reserves also caused a sensation.
But a few weeks later the governor of the Saudi Arabia Monetary Authority, Muhammad al Jasser, insisted to news reporters that Saudi Arabia had not purchased the gold cited in the June reports but rather had possessed that extra gold all along, holding it in what he called “other accounts”:
That is, the seemingly new Saudi gold had been held in accounts not reported officially, just as the true status of China’s gold accounts was not reported officially for six years, if the true status is being reported even now.
Some analysts think that China and Saudi Arabia have accumulated far more gold than they’re reporting and are accumulating still more gold surreptitiously — China to hedge its dollar foreign exchange surplus, Saudi Arabia to hedge both its dollar surplus and the depletion of its oil reserves — but that China and Saudi Arabia can’t acknowledge this accumulation lest they spook the currency markets, explode the gold market, and devalue their dollar surpluses before those surpluses are fully hedged.
The United States claims to hold almost 8,200 tonnes of gold. But has any of that gold been swapped with other central banks through the gold swap arrangements Fed Governor Warsh disclosed in his letter denying GATA’s request for access to the Fed’s gold documents? The Fed won’t be answering that question voluntarily. It will be answered only at the order of the federal court in which GATA is suing the Fed, or at the direction of Representative Paul’s subcommittee.
Conflicts of interest at ETFs
Then there are the major gold and silver exchange-traded funds, which were established in the last few years supposedly to help ordinary investors invest conveniently in gold and silver. How much metal do the ETFs have?
While the major gold and silver ETFs frequently report their metal holdings, studies by GoldMoney founder James Turk and former GATA board member Catherine Austin Fitts and her lawyer, Carolyn Betts, suggest that this data is unreliable too:
For the major ETFs won’t disclose exactly where their metal is, and indeed their prospectuses say it’s OK for the ETFs not even to know where their metal is kept among custodians and sub-custodians.
Further, the custodians for the major gold and silver ETFs are, perhaps not so coincidentally, also the two major international banks — J.P. Morgan Chase and HSBC — that report having the biggest short positions in gold and silver, short positions that give these banks and metal custodians a powerful interest in suppressing the price of the assets they supposedly are holding for investors who want those assets to rise in price.
How much gold do the major gold and silver ETFs really have in their vaults? How much of it is encumbered in some way? ETF investors themselves may never be permitted to know.
The biggest so-called “physical” gold market in the world is run by the London Bullion Market Association. The LBMA publishes statistics on how much gold and silver are traded by its members. But these statistics show spectacular volumes, more metal than could exist. Of course much of this metal could be sold and resold back and forth many times every day. But an expert in that market, Jeffrey Christian of the CPM Group, acknowledged at a hearing of the U.S. Commodity Futures Trading Commission last March, as he had acknowledged in an explanatory report published in 2000, that the London bullion market is actually a fractional-reserve gold banking system built on the assumption that most gold buyers will never take delivery of their metal but rather leave it on deposit with the LBMA member banks from which they bought it.
GATA board member Adrian Douglas has studied the LBMA statistics and Christian’s work and estimates that the great majority of gold sold by LBMA members doesn’t exist — that most gold sales by LBMA members are highly leveraged. How leveraged? How much gold is due from LBMA members that doesn’t really exist? Of course the LBMA doesn’t report that. Like the Fed’s gold swap arrangements, the world must not be permitted to know that much of the gold the world thinks it owns is imaginary. The consequences might be catastrophic for the banks that have sold that imaginary gold.
For then the world might understand why even at its recent price above $1,300 per ounce gold has not come close to keeping up with the inflation, the currency debasement, of the last few decades, why gold has not completely fulfilled its function of hedging against inflation.
That is, gold’s enemies figured out how to increase gold’s supply by vast amounts without going through the trouble of digging it out of the ground. They invented “paper gold” — imaginary gold that many buyers accepted, never suspecting that major financial institutions might deceive or defraud them.
Negligent journalism about gold
The misunderstanding of the gold market is worsened with the awful journalism about it.
The falsity of the data about the gold market practically screams at financial journalists:
– There is the omission by official gold reserve reports of leased and swapped gold.
– There are the sudden huge changes in official gold reserve totals.
– And there are the deception and conflicts of interest built into ETF prospectuses.
The valid documentation about the gold market also practically screams at financial journalists as well:
– There are the huge and disproportionate gold, silver, and interest rate derivative positions built up at just two or three international banks, positions that never could be undertaken without the express or implicit underwriting of government, particularly the U.S. government.
– And there are the many official records, records collected and publicized by GATA over the years, demonstrating the plans and desire of the U.S. government to suppress and control the price of gold.
But somehow financial journalists just don’t ask about these things. After all, who are the major advertisers in the financial news media? The market manipulators and governments themselves.
Here are a couple of examples of this gross failure of journalism in the last year.
Last June the Bank for International Settlements, the central bank of the central banks, disclosed, via a footnote in its annual report, that it had undertaken a gold swap of unprecedented size, 346 tonnes. But the BIS provided no explanation for this. A newsletter writer was the first to come upon the information; only then did it leach into the major financial news media. What was going on here?
The reporters for the major financial news media didn’t bother going to the source, didn’t bother asking the BIS itself. It was simply assumed that central banks never give serious answers about what they do, particularly in regard to gold. Instead the reporters called various gold market analysts for what they hoped would be informed speculation.
A few days after GATA ridiculed the Reuters news agency for not demanding answers from the source of the swaps, the BIS, Reuters did try putting some questions to the bank, and on July 16 last year Reuters reported: “The BIS said the gold in question was used for ‘pure swap operations with commercial banks’ but declined to respond to further questions from Reuters on the transaction”:
Ever since Federal Reserve Governor Warsh admitted to GATA that the Fed has secret gold swap arrangements with foreign banks, I have been urging financial journalists to call the Fed to ask about those arrangements. As far as I know, no news organization has put such questions to the Fed officially. But, a bit intrigued, a reporter for a major news agency, having failed to get her editor’s authorization to pursue a story about gold, called the Fed on her own and did ask about the gold swap arrangements. She told me that a Fed spokesman had told her: “Oh, we never talk about those things.”
GATA has been gaining publicity, if with difficulty. Last year the Financial Times did a big story about gold that was half about GATA’s complaints about gold price manipulation by central banks and their agents, the bullion banks. But amazingly the FT reporter failed to put any questions to any central bank or government official:
How can you report complaints of central bank gold price manipulation without questioning central banks themselves? Again, it is just taken for granted that central banks operate in secret, particularly in regard to gold, and there’s no point in questioning them.
Why gold and silver are mysteries
Why is gold such a mystery? Why is it, along with silver, kept such a mystery?
It’s because the two precious metals are not only money but, from the point of view of free people, the best sort of money, less susceptible to what governments see as the most desirable quality of money — the susceptibility to control by government and particularly susceptibility to devaluation. You can print or otherwise issue gold and silver derivatives to infinity, but not the metals themselves.
Gold particularly is kept such a mystery because it is the key to unlocking the currency markets, which long have been the most efficient mechanisms of imperialism.
Many of you have heard about the looting of Europe undertaken by the Nazi German occupation during World War II. But most of that looting did not take place as it is imagined, at the point of a gun. No, it took place through the currency markets.
This looting through the currency markets was spelled out by the November 1943 edition of a military intelligence letter published by the U.S. War Department, a letter called Tactical and Technical Trends. Of course the Nazi occupation seized whatever central bank gold reserves had not been sent out of the occupied countries in time. But then the Nazi occupation either issued special occupation currency that could not be used in Germany itself or, in countries that had fairly sophisticated banking systems, took over the domestic central bank and enforced an exchange rate much more favorable to the reichsmark. Or else the Nazi occupation simply printed for itself and spent huge new amounts of the regular currency of the occupied country.
This control of the currency markets drafted everyone in the occupied countries into the service of the occupation and achieved a one-way flow of production — a flow out of the occupied countries and into Nazi Germany.
For a few years Nazi Germany had one hell of a trade deficit — and couldn’t have cared less about it. For being in the position to print the currencies for occupied Europe, Nazi Germany never had to cover that deficit, at least not as long as the military occupation continued.
Since the United States now issues the reserve currency for the world, the dollar, the United States now more or less occupies most countries economically, even those countries that have their own currencies, since even those countries hold most of their foreign exchange reserves in dollars.
Free-trading and widely accessible gold always has been and always will be doom to the rigging of the currency markets, always will be the escape from overbearing government generally and from any overbearing government in particular. That is why those U.S. government records compiled by GATA over the years candidly discuss or advocate or describe controlling and suppressing the gold market — and suppressing the truth itself.
The secret knowledge
The truth as GATA sees it is this:
First, gold is the secret knowledge of the financial universe and its true value relative to currencies is vastly greater than its nominal price today, since much of the gold that investors think they own doesn’t exist. The actual disposition of Western central bank gold reserves is a secret more closely guarded than the blueprints for the manufacture of nuclear weapons. For gold is a deadly weapon against unlimited government.
Second, all technical analysis of all markets now is faulty if it fails to account for pervasive and surreptitious government intervention.
And third, the intervention against gold is failing because of overuse, exposure, exhaustion of Western central bank gold reserves from gold sales and leasing, and the resentment of the developing world, which is starting to figure out how it has been expropriated by the dollar system, a system in which people do real work and create real goods and send them to the United States in exchange for nothing but colored paper and electrons.
For years now the Western central banks have been attempting a controlled retreat with gold, bleeding out their reserves with sales, leases, and especially derivatives so that gold’s ascent and the dollar’s inevitable decline may be less shocking. Central bankers often convey part of this strategy in code; they warn against what they call a “disorderly decline” in the dollar, as if an “orderly” decline is all right.
The rise in the gold price over the last decade is just the other side of that coin — an “orderly” rise, 15-20 percent or so per year, a rise carefully modulated by surreptitious central bank intervention.
But GATA believes that the central banks may have to retreat farther with gold than anyone dreams, and far more abruptly than they have retreated so far. We believe that when the central banks are overrun in the gold market, as they were overrun in 1968, and the market begins to reflect the ratio between, on one hand, the supply of real gold, actual metal, not the voluminous paper promises of metal, and, on the other hand, the explosion of the world money supply of the last few decades — as the market begins to perceive the difference between the real and the unreal — there may not be enough zeroes to put behind the gold price.
Market analysts talk about what they call “reversion to the mean.” But maybe we should talk about reversion to the real.
A century ago Rudyard Kipling anticipated this when he wrote a poem that foresaw the decline of the empire of his country, Great Britain. Kipling’s poem attributed this decline to the loss of the old virtues, the virtues that were listed at the top of the pages in the special notebooks, called “copybooks,” that were given to British schoolchildren at that time — virtues like basic honesty, fair dealing, Ten Commandments-type stuff. Kipling titled his poem “The Gods of the Copybook Headings,” and its conclusion is a warning to the empire that succeeded the one he was living in:
Then the gods of the market tumbled,
And their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled
And began to believe it was true
That all is not gold that glitters,
And two and two make four,
And the gods of the copybook headings
Limped up to explain it once more.
As it will be in the future,
It was at the birth of man.
There are only four things certain
Since social progress began:
That the dog returns to his vomit
And the sow returns to her mire,
And the burnt fool’s bandaged finger
Goes wabbling back to the fire;
And that after this is accomplished,
And the brave new world begins,
When all men are paid for existing
And no man must pay for his sins,
As surely as water will wet us,
As surely as fire will burn,
The gods of the copybook headings
With terror and slaughter return.
The problem goes far beyond gold price suppression. Indeed, since central bank intervention in the currency, bond, equities, and commodity markets has exploded over the last few years, we don’t really know what the market price of anything is anymore. Thus the gold price suppression story is a story about the valuation of all capital and labor in the world — and whether those values will be set openly in free markets, the democratic way, or secretly by governments, the totalitarian way.
The specifics of the gold price suppression operation are complicated, but you don’t have to remember them all if you know what they mean.
They mean that there is a currency war going on between countries and their central banks, and a war being waged by central banks against the people of their own countries. There has been such a war for many years, only the victims were not really fighting back. Now some of them are, countries and individuals alike, by buying and taking delivery of the monetary metals. (Now all we need to do is find a safe planet to keep them on.)
The focus on London
London may seem like the belly of the beast of Anglo-American imperialism, being home to both the LBMA and the Bank of England, whose surrender of the better part of Britain’s gold reserves a decade ago, at the bottom of the market and at the onset of a short squeeze, makes sense only as part of the gold price suppression scheme and the rescue of influential bullion banks that were caught short at the market’s turn.
But let us instead see this scheme as an aberration and London as the city where the rescue of all decent civilization was arranged even as the bombs of the most horrifying evil fell upon it. The St. Paul’s that was so famously surrounded by the fire and smoke of those bombs is just around the corner from this grand old building; please forgive a rube tourist for being a bit in awe of it all. GATA actually has a few friends in this city and hereabouts. So this may be as good a place as any to clamor for the most cosmic justice. After all, isn’t it practically in your anthem?
And did the Countenance Divine
Shine forth upon our clouded hills?
And was Jerusalem builded here
Among these dark, Satanic … central banking systems?
I don’t think Blake would mind too much about that rewriting if he was still around and knew the facts of the situation. He might even make it rhyme.
We in GATA have our bow of burning gold; we have our arrows of desire. But we can always use more, and with your help we will do more to restore our dear countries, Britain and America together, to their principles and ideals of democratic, transparent, limited government, and, really, the brotherhood of man, which, in the end, are what the monetary metals are about.
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Clemens Kownatzki submits:
The World Gold Council recently issued its Gold Investment Digest for 2010 which provides, among many other interesting data points, a listing of official gold holdings of various countries. Notable highlight in our chart is the fact that the ETF GLD has been the 6th largest holder of gold at the end of 2010 (in case you were wondering what has been driving the price of gold in recent years).
The bullish trend remains as the structural changes in the Commitment Of Traders report continues to become more bullish. Despite the downside pressure over the past couple of weeks, the fourth and eighth largest commercial traders continue to cover their massive net short positions, albeit in a very controlled fashion, paving the way for much higher prices in the future. The total net short position of all commercial traders declined more than 2,000 contracts, including over a 300 contract reduction in the top four commercial traders, and over a 1200 contract reduction among the eight largest commercial traders. This is indicative of the commercial traders recognizing the tightness in physical market.
At first glance, silver’s annual supply from mine production and from the secondary market paints a bearish picture; we need to put all these line items into perspective before making a qualified judgment.
While annual mine supply has been climbing, the rate of increase is expected to moderate in 2011 and beyond. The secondary markets for silver are also expected to moderate, stabilize and decline, while Indian scrap has already begun its descent over recent years. While I still see annual silver supply increasing for years to come (from world mining output as higher prices makes It more lucrative to take on new projects), industrial demand will do the same.
Gold price in 2010 driven by recovery in key sectors of demand and continued global economic uncertainty
Investors reap dual rewards of return and diversification as gold outperforms equities, treasuries and commodity indices.
The World Gold Council (WGC) has returned to the Vicenza Fair with “Gold Expressions 2011” – a collection deeply rooted in gold’s extraordinary heritage and crafted by the finest gold jewellers of today.