http://www.caseyresearch.com/gsd/edition/finance-ministry-in-netherlands-denies-what-its-central-bank-president-admi
Submitted by Tyler Durden on 02/15/2014 09:44 -0500
Gold has been the best performing asset since the Fed tapering began on December 18th, 2013. Most analysts were, and many still are, calling for gold to hit $875 this year. How they arrived at that conclusion is beyond rational comprehension, given that if gold stayed below $1200 for any length of time most gold mines would be shuttered. Moreover, almost every bearish Wall Street analyst never even considers the enormous amount of gold being accumulated by China. I don't understand how these people can call themselves professionals when they are ignoring two obviously fundamental variables affecting the price of gold.
As we know, belief without evidence is nothing but faith. It would seem to me that Wall Street is exercising bad faith in their assessment of the gold market.
At any rate, the fact and evidence stands that gold has been outperforming everything since mid-December. One reason for this is that the Fed and the bullion banks have been forced by the sheer size of the demand from Asia to "retreat" from the unprecedented manipulation of the price of gold over the last 2 years. The reason for the "retreat" is to let the price of gold rise in an attempt to slow down the massive demand for physical gold.
But there are several fundamental reasons that investors now perceive gold to be undervalued, especially relative to the U.S. stock market. First, there's no question now that the U.S. economy is rapidly slowing down. Auto, retail and home sales are declining and it's becoming clear that the cold weather/dog ate my homework excuse is not cutting it. Again, when you look at data available that Wall Street and CNBC conveniently overlook, it's pretty obvious that the majority of Americans are cash strapped, have piled on new debt and are living from hand to mouth. I doubt 99%'ers are going to be rushing out this year to buy a new Lennar home and a shiny BMW for the driveway.
Because of this, it is probable that Janet Yellen will have to reverse the taper and start printing even more money than the $65 billion/month being printed after the first two tapers. Let's not forget, taper or not, the Fed is still printing at a rate of $780 billion per year. In addition, assuming Stanley Fisher is confirmed as Yellen's partner in crime, we can expect to see them implement a negative Fed funds rate policy. Most people are unaware of this, but Fisher is a huge academic proponent of negative interest rates as a means to try and stimulate economic growth (Israeli-born, he was an economics professor at the University of Chicago and at MIT before going on to try and destroy the world with his ideas). Furthermore, Janet Yellen launched her bid to replace Bernanke with a speech in early 2012 advocating negative rates to stimulate employment.
For the record, negative interest rates are gold's rocket fuel.
Finally, I find it curious that very little attention has been paid to the fact that the Government is now operating until March 15, 2015 without any debt ceiling limit. Quite frankly, there should be outrage from both the media and the public. No one seemed to even notice. But letting the Government go for a year without ANY spending restraints is the equivalent of letting a multi-convicted pedophile operate a daycare center that has a sleepover option for parents who travel a lot.
In my view, unlike most mainstream investors, the smart money buying gold did happen to take notice of the unlimited credit card that Congress just gave the Obama Government. It actually became obvious last Friday to those few of us who do follow the news that affects our system that Boehner's House would pass a "clean" debt issuance extension. Since last Friday gold is up $57, or 4.5%. The GDXJ junior mining stock index is up 14%. In comparison, the S&P 500 is up 2.6%.
Things are going to start to really unravel in our economic and political system this year. As the underlying conditions deteriorate expect the Orwellian "things are getting better" lies to intensify. Try to enjoy what you can, while you can because life will likely become a lot more difficult for most of us this year.
¤ YESTERDAY IN GOLD & SILVER
The gold price didn't do much in Far East trading on their Friday, but was up about six bucks by the time the London morning gold fix was done for the day at 10:30 a.m. GMT. From that point, a more serious rally began that got sold down a bit at the noon GMT silver fix. Another rally began at 8:45 a.m. EST---and that rally was brought to an end at the London p.m. gold fix, which was 10 a.m. in New York. After that, the gold price traded quietly sideways for the remainder of the day.
The CME Group recorded the low and high ticks as $1,299.90 and $1,321.50 in the April contract.
Gold closed in New York late Friday afternoon at $1,319.10 spot, which was up $16.30 from Thursday's close. Volume sans February and March, was very decent at 158,000 contracts.
As I mentioned in The Wrap in yesterday's column, silver jumped up about 40 cents starting around 9 a.m. Hong Kong time---and ran into the usual wall of selling by JPMorgan et al. Then the price traded more or less sideways until shortly before 3 p.m. in Hong Kong---and at that point the price took on a positive bias which accelerated once the London a.m. gold fix was in. The steady rally that began there [with a couple of tiny capped rallies along the way] continued for the rest of the Friday session---and the silver price closed on its high of the day.
The high and low ticks were recorded at $20.445 and $21.490 in the March contract.
Silver closed in New York at $21.505 spot, up $1.02 on the day. Not surprisingly, net volume was extremely high at around 56,500 contracts.
Platinum and palladium traded flat until shortly after 1 p.m. Hong Kong time---and then rallied until lunchtime in New York. After that they traded sideways. Here are the charts.
The dollar index closed late in New York on Thursday afternoon at 80.30---and immediately began to sag as the trading day began on Friday in the Far East. The low tick of 80.08 came shortly before 12:30 p.m. GMT in London. The index bounced off that low a bit, but gave back most of it by the New York close---finishing the week at 80.14---which was down 16 basis points from Thursday's close.
****
The CME's Daily Delivery Report showed that 121 gold and 7 silver contracts were posted for delivery within the Comex-approved depositories on Tuesday. There were four different short/issuers, with JPMorgan out of its in-house [proprietary] trading account with 64 contracts, being the largest---and the two biggest long/stoppers were HSBC USA and Barclays with 64 and 24 contracts respectively There are still around 700 gold contracts open in the February delivery month---and only a handful of silver contracts. The link to yesterday's Issuers and Stoppers Report is here.
I was very surprised to see that there were big withdrawals from both GLD andSLV yesterday. With the price action we've been experiencing over that last week in both metals, one would have thought the opposite would be occurring. TheGLD ETF reported that an authorized participant withdrew 163,874 troy ounces---and in SLV, an authorized participants took out a chunky 1,923,884 troy ounces. The only reason that I can think of why metal would be disappearing out of these two ETFs would be that it was more desperately need by their owners at some other location. I will be watching the in/out moments of both these ETFs like the proverbial hawk during the next five business days.
Joshua Gibbons, the "Guru of the SLV Bar List", updated his website with the current in/out bar action over at SLV---and here is what he had to say in his comments on Thursday: "Analysis of the 12 February 2014 bar list, and comparison to the previous week's list---1,442,942.6 troy ounces were removed (all from Brinks London), and no bars were added or had a serial number change."
"The bars removed were from: Handy Harman (0.3M oz), Solar Applied Materials (0.3M oz), Noranda (0.2M oz), Degussa (0.2M oz), and 12 others. As of the time that the bar list was produced, it was overallocated 581.9oz. 1,442,970.0 troy ounces were added Tuesday, but not yet reflected on the bar list." The link to Joshua's website is here.
The U.S. Mint had a small sales report yesterday. They sold 2,000 ounces of gold eagles---2,000 one-ounce 24K gold buffaloes---and only 25,000 silver eagles. Month-to-date the mint has sold 13,000 ounces of gold eagles---9,500 one-ounce 24K gold buffaloes---and 1,750,000 silver eagles. Based on these sales, the silver/gold sales ratio work out to 77 to 1.
There was very little in/out activity in gold within the Comex-approved depositories on Thursday. They reported receiving 2,199 troy ounces---and shipped nothing out. The link to that activity, such as it was, is here.
There was more action in silver, of course, as 553,557 troy ounces were reported received---and 175,262 troy ounces shipped out. All of the activity was at the CNT Depository---and the link to that action is here.
[Note: the Delaware depository is back. If I'd just read the remarks at the bottom of the page, that would have explained part of it..."One or more depositories were not able to report changes today due to weather conditions on the East Coast." That makes sense, but only up to a point, as there was no reason I could see that they would remove the entire depository data from Thursday's report.]
The Commitment of Traders Report was another strange one, as there was a clear dichotomy once again between what was going on in silver vs. gold---at least on the surface. But it's what Ted Butler found under that hood that should make us stand up and take notice.
After a terrific COT Report in silver during the prior week, it was exactly the opposite with yesterday's report, as the Commercial net short position in silver blew out by a huge 7,565 contracts, or 37.8 million troy ounces. The Commercial net short position in silver is now back up to 112.1 million ounces.
Ted said that 100% of the short covering by the technical funds was covered by raptors [Commercial traders other than the Big 8] selling 10,000 long Comex contracts at a profit during the reporting week. The big surprise was that JPMorgan used the opportunity to cover another 1,000 contracts of its short-side corner in the Comex futures market, which is now down to 13,000 contracts. I mentioned yesterday that one of my concerns during this short-covering rally was the JPMorgan was going to go even further short the silver market. The numbers show that my fears were unfounded---as in actual fact, JPMorgan did exactly the opposite. If you think that this turn events may be bullish for silver in the long term, you would be right about that---if JPMorgan continues down this path.
In gold, the Commercial net short position increased by a very small 6,872 contracts, or 687,200 troy ounces. Not only was the small increase a surprise considering the price activity during the reporting week, Ted Butler says that there was virtually no short covering by the technical funds! It was all the Big 8. And in the fray, Ted said that JPMorgan managed to increase their long-side corner in the Comex gold market from 66,000 contracts to 68,000 contracts! JPM's long-side corner in gold still sits at 21% of the entire Comex futures market on a net basis.
We've had three rally days in a row in gold and silver since the Tuesday afternoon Comex cut-off for yesterday's COT Report. I'm sure that next Friday's Commitment of Traders Report won't make for happy reading on the surface. However, in the last two COT Reports, it's what Ted has found under the surface that really shows what's going on, as JPMorgan has been covering silver short positions---and going further long the gold market. They appear to heading for the exits as quietly as possible under the cover of the first decent rally in the precious metals in years. You couldn't make this stuff up!
****
Selected non redundant news and views......
Doug Noland: Transitions
China’s “shadow banking” problem today encapsulates the inherent risks of contemporary “money” (“financial claims perceived as safe and liquid stores of nominal value”), most prominently money’s dangerous attribute of virtually insatiable demand. Incredible amounts of perceived safe “money” have flowed freely into risky Credits, while people have no idea what they’ve invested in. Credit risk has been further elevated by system-wide Credit excess, resource misallocation and corruption. The historic scope of the Bubble was made possible by the faith Chinese have in their government and government-backed banking system – as well on an international basis by the perception that Chinese policymakers have everything under control (within a backdrop of massive QE and seemingly unlimited liquidity).
There was a crucial policy debate from the late-twenties that has become increasingly pertinent, especially for Beijing and Washington. In the “Roaring Twenties” there was recognition within policy circles that heightened speculation was fostering financial excess including Credit financing speculative trading and other ventures. At the same time, heightened economic vulnerability and downward pricing pressures had policymakers searching for ways to direct Credit into productive investment and away from speculation. Yet, at the end of the day, the intensity of 1927-1929 “terminal phase” speculative excess ensured that liquidity and Credit flowed disproportionately to inflating market Bubbles. Thoughts, efforts and hopes that policy measures could redirect finance away from market Bubbles and to the real economy ended in complete and utter failure.
There was a crucial policy debate from the late-twenties that has become increasingly pertinent, especially for Beijing and Washington. In the “Roaring Twenties” there was recognition within policy circles that heightened speculation was fostering financial excess including Credit financing speculative trading and other ventures. At the same time, heightened economic vulnerability and downward pricing pressures had policymakers searching for ways to direct Credit into productive investment and away from speculation. Yet, at the end of the day, the intensity of 1927-1929 “terminal phase” speculative excess ensured that liquidity and Credit flowed disproportionately to inflating market Bubbles. Thoughts, efforts and hopes that policy measures could redirect finance away from market Bubbles and to the real economy ended in complete and utter failure.
Doug Noland's weekly Credit Bubble Bulletin posted over at theprudentbear.com Internet site every Friday evening always fall into the must read category---and yesterday's edition is no exception. I thank reader U.D. for sharing it with us.
European Banks Avoiding Risky Loan Disclosure Face Review
A dark corner of European finance is about to be illuminated by European Central Bank inspectors who are sifting through loans that banks restructure for clients and don’t fully disclose.
“What’s scaring investors is the question of whether banks are giving money to companies that deserve to go bankrupt and keeping them alive to avoid recording losses,” Mascia Bedendo, an assistant professor of finance at Bocconi University in Milan, said in a phone interview. “The amount of forborne and nonperforming loans is still very obscure.”
Four of the continent’s 10 biggest banks by assets don’t quantify loans they renegotiate, company filings show. Less than one-third of 39 major lenders disclose what the European Securities and Markets Authority calls “clear quantitative information.” None of the firms that publish figures, including Deutsche Bank AG and Intesa Sanpaolo SpA, reveal as much as U.S. counterparts such as JPMorgan Chase & Co.
This very long, very interesting, but very disturbingBloomberg story, filed from Frankfurt, was posted on their Internet site early yesterday morning Denver time---and I thank Ulrike Marx for her second offering in today's column.
Three King World News Blogs
1. William Kaye: "This is Why the Gold and Silver Shorts Are So Terrified Today". 2. Egon von Greyerz: "$10,000 Gold, $50,000 Gold---and the Coming Frightening Chaos". 3. Art Cashin: "This is the Great Danger Facing the World Today".
Finance Ministry in Netherlands denies what its central bank president admitted
GATA's expedition this month to Suriname is causing some uncomfortable prodding for the South American country's former colonial ruler, the Netherlands.
Suriname's largest newspaper, De Ware Tijd, reported on Friday that the Netherlands Ministry of Finance is affecting ignorance of the price-suppressive purpose of the Dutch government's longstanding role in the gold market, a purpose acknowledged in the memoirs of the former president of the Netherlands Central Bank, Jelle Zijlstra, who was simultaneously president of another central bank intimately involved in gold price suppression, the Bank for International Settlements.
The Netherlands was a participant in the London Gold Pool, a mechanism established by the United States, United Kingdom, and six other European countries to control the gold price in the 1960s.
Zijlstra recorded in his memoirs that "gold is artificially kept at a far too low price" at the behest of the U.S. government, which sought support for the dollar against gold and other currencies.
This absolute must read commentary by GATA's secretary/treasurer Chris Powell was posted on the gata.orgInternet site yesterday.
Alasdair Macleod: China's gold demand
GoldMoney research director Alasdair Macleod explains why Western analysis underestimates gold demand in China.
His commentary is headlined "China's Gold Demand" and it's posted at GoldMoney's Internet site. I found this short essay by Alasdair embedded in a GATA release yesterday.
GoldCore's O'Byrne: Gold's technicals support positive fundamentals -- 9 key charts
Mark O'Byrne's gold market commentary at GoldCore's Internet site on Friday details the bullish fundamentals and observes that gold is flowing out of Western central bank vaults and into Asia at an increasing pace. Vaults in Singapore, O'Byrne writes, seem to be filling up especially fast.
O'Byrne's commentary is headlined "Gold's Technicals Support Positive Fundamentals -- 9 Key Charts" and it's posted at GoldCore's Internet site. This is another gold-related news item that I found posted on the gata.org Internet site yesterday---and the charts are worth your time.
Amplats Sues Platinum-Strike Union as Talks Stumble
Anglo American Platinum Ltd. is suing a South African union that is on strike at the world’s largest producers of the metal and said pressure is growing on the labor group over its three-week walkout.
More than 70,000 Association of Mineworkers and Construction Union members have been on strike since Jan. 23 at Anglo American Platinum, Impala Platinum (IMP) Holdings Ltd. and Lonmin Plc. They are demanding that monthly wages for the lowest-paid underground workers be more than doubled.
Amplats, as the Johannesburg-based company is known, is suing the AMCU for 591 million rand ($54 million), spokeswoman Mpumi Sithole said today in an e-mail. The company is claiming for damage to property, increased security costs and production losses caused by non-striking employees being prevented from going to work, Sithole said.
This Bloomberg news item was posted on their website yesterday morning MST---and is certainly worth reading. I thank Ulrike Marx once again for finding it for us.
Gold premiums in India fall to 4-month low on talk of import duty cut
Gold premiums in India, the world's second-biggest consumer of the metal after China, fell 17% on Friday to their lowest in four months as buyers postponed purchases on speculation over a possible cut in import duty next week.
Premiums were quoted at $62 an ounce, a level last seen in the second week of October last year, compared to $75 on Thursday. Premiums hit a record $160 last month.
Sonia Gandhi, has asked the government to review tough import restrictions on gold, which include a record 10 percent import duty, local media reported on January 23.
This gold-related news item was posted on the business-standard.com Internet site yesterday afternoon IST---and once again I thank Ulrike Marx for sharing it with us.
Lawrence Williams: Gold and the Dow---Beware the Ides of March
Sentiment could be beginning to change again for gold. Towards the end of last year many even hitherto pro-gold investors had decided it was time to get out of the metal and the pundits were almost universal in their disdain for it. Indeed investors may well have been worn down by the almost constant media schadenfreude as those who had missed the boat on gold’s constant rise over the previous 12 years gloated as they saw gold fall almost 30% in a year.
By the beginning of this year virtually every bank analyst was predicting another weak year for precious metals, and the recent strength seems to have taken them all by surprise. But, as the saying goes, one swallow does not a summer make, and it is perhaps too early yet to call an end to the bear market in gold but at least there is an aura of hope in the air for the beleaguered precious metals investor.
Now the move upwards which we have seen over the past two months may yet be short lived, but even so gold has risen by over $100 – or nearly 10% - from its $1187 low in mid-December and has probably been the best performing asset class so far this year with the rise in the metal price itself being sharply exceeded by that in gold stocks – the HUI (ARCA Gold Bugs Index) having risen over 20% since market close just before Christmas.
This commentary by Lawrie was posted on the mineweb.comInternet site yesterday---and is also worth the read. I thank Ulrike Marx for her final contribution to today's column.
****
¤ THE WRAP
I understand some wanting to make excuses for JPMorgan’s undeniably large market shares in gold and silver. There is an instructive message here as well – since JPM’s market corners can’t be denied, all that’s left is trying to explain it away any way possible. The excuses confirm that the market shares held by JPM exist and need explaining. Oh, and one last flimsy excuse is needed to explain, if these outsized market corners are so normal, why is there only one bank atop the gold and silver market heap? If this market making is such a legitimate business – why aren’t other banks offering competition? I have a better question - why is JPMorgan so entrenched in gold and silver trading, when they are withdrawing from every other commodities business? (I say because they can’t exit quietly as they are the market). - Silver analyst Ted Butler: 12 February 2014
It was encouraging to see such positive precious metal price action on a Friday---and I certainly hope that this is a harbinger of things to come. It certainly should be, as all the precious metals are many orders of magnitude lower in price than they would be if their respective prices weren't being managed in the Comex futures market by JPMorgan et al.
I really stood up and took notice of the actions of JPMorgan in the latest COT Report that came out yesterday. As I mentioned further up, it showed that, for the second week in a row, they had decreased their short-side corner in the Comex silver market---and increased their long-side corner in the gold market. I was impressed that it happened in the prior week's COT Report, but when it happened twice in row in the current price environment, I must admit that I'm really paying attention now.
As I said recently in this space, for many years both Ted Butler and myself had mused about the possibility that JPMorgan may step in front of the raptors as they sold their long positions in silver to the short-covering technical funds as silver prices rallied, but the last two weeks COT Report shows that this actually happened. I'm now looking at the precious metal rallies of the last three days since the cut-off in a whole new light. I'm wondering if JPMorgan was pulling the same trick during those three days as well---especially with Friday's huge volume. It would be easy to hide that sort of activity behind the skirts of a price move like we had in silver yesterday. Of course we'll have to wait until next Friday's COT Report to see if this was, in fact, the case.
As you can see from the 6-month charts in both gold and silver posted below, we are now in overbought territory in both metals---and it wouldn't surprise me in the slightest if "da boyz" engineered a price decline at some point in time in the near future. On top of the short positions in silver that JPMorgan has managed to cover during the last week, not to mention the ever-increasing long-side corner in gold, it would be the perfect opportunity to cover even more short positions during such an event. When it might occur is unknown, but it's a certainty that it will. You can bet on it.
Once that "correction" is behind us---and JPMorgan is fully out of their Comex short position in silver---it could get interesting to the upside. We'll find out pretty quick I would think.
I was also amazed by the withdrawals from both GLD and SLV yesterday. It's entirely possible that the silver may have been needed elsewhere, but that certainly doesn't explain the withdrawal in gold. And after Friday's big day in all four precious metals, it's a safe bet that just about every precious metal ETF on Planet Earth is now owed a very decent amount of metal. One has to wonder where it will all come from, especially silver.
Here's Nick Laird's Total PMs Pool chart updated as of the end of this week. Both lines are heading in the right direction, but both have a long way to go to get back to where they once were. But get there, they will.
As I head off to bed, I can't help but marvel at the events of the last two weeks. I can't say for sure when the price management scheme in the precious metals will come to an end, but based on the evidence I'm looking at right now, it's days are definitely numbered.
I look forward to next week's price action with more than the usual amount of interest, starting with the New York open on Sunday night EST.
By the way, with what appears to be the start of a major up-trend in the precious metals, it might be worth your while to jump back in, or increase your exposure to the precious metals once again, as the HUI is already up over 22% year-to-date. Your best bets for that are Casey Research's monthly BIG GOLD newsletter---andCasey Research's flagship publication---Casey International Speculator. If you go for Casey International Speculator, it includes a subscription to BIG GOLD at no extra charge. It costs nothing to check them out---and Casey Research's 90-day money back guarantee applies to both.
See you on Tuesday.
Additional items.......
http://www.zerohedge.com/news/2014-02-15/james-turk-erosion-trust-will-drive-gold-higher
James Turk: Erosion of Trust Will Drive Gold Higher
Submitted by Casey Research
James Turk: Erosion of Trust Will Drive Gold Higher
James Turk, founder of precious metals accumulation pioneer GoldMoney, has over 40 years' experience in international banking, finance, and investments. He began his career at the Chase Manhattan Bank and in 1983 was appointed manager of the commodity department of the Abu Dhabi Investment Authority.
In his new book The Money Bubble: What to Do Before It Pops, James and coauthor John Rubino warn that history is about to repeat. Instead of addressing the causes of the 2008 financial crisis, the world's governments have continued along the same path. Another—even bigger—crisis is coming, and this one, say the authors, will change everything.
One central tenet of your book is that the dollar's international importance has peaked and is now declining. What will the implications be if the dollar loses its reserve status?
In a word, momentous. Although the dollar's role in world trade has been declining in recent years while the euro and more recently the Chinese yuan have been gaining share, the dollar remains the world's dominant currency. So crude oil and many other goods and services are priced in dollars. If goods and services begin being priced in other currencies, the demand for the dollar falls.
Supply and demand determine the value of everything, including money. So a declining demand for the dollar means its purchasing power will fall, assuming its supply remains unchanged. But a constant supply of dollars is an implausible assumption given that the Federal Reserve is constantly expanding the quantity of dollars through various forms of "money printing." So as the dollar's reserve status erodes, its purchasing power will decline too, adding to the inflationary pressures already building up within the system from the Federal Reserve's quantitative easing program that began after the 2008 financial collapse.
Most governments of the world are fighting a currency war, trying to devalue their currencies to gain a competitive advantage over one another. You predict that China will "win" this currency war (to the extent there is a winner). What is China doing right that other countries aren't? How would the investment world change if China did "win"?
As you say, nobody really wins a currency war. All currencies are debased when the war ends. What's important is what happens then. Countries reestablish their currency in a sound way, and that means rebuilding on a base of gold. So the winner of a currency war is the country that ends up with the most gold.
For the past decade, gold has been flowing to China—both newly mined gold as well as from existing stocks. But that flow from West to East has accelerated over the past year, and there are unofficial estimates that China now has the world's third-largest gold reserve.
The implications for the investment world as well as the global monetary system are profound. Why should China use dollars to pay for its imports of crude oil from the Middle East? What if Saudi Arabia and other exporters are willing to price their product and get paid in Chinese yuan? Venezuela is already doing that, so it is not a far-fetched notion that other oil exporters will too. China is a huge importer of crude oil, and its energy needs are likely to grow. So it is becoming a dominant player in global oil trading as the US imports less oil because of the surge in its own domestic fossil fuel production.
Changes in the way oil is traded represent only one potential impact on the investment world, but it indicates what may lie ahead as the value of the dollar continues to erode and gold flows from West to East. So if China ends up with the most gold, it could emerge as the dominant player in global investments and markets. It already has become the dominant player in the market for physical gold.
You draw a distinction between "financial" and "tangible" assets, noting that we go through a recurring cycle where each falls in and out of favor. Where are we in that cycle? With US stocks at all-time highs and gold down over 30% since the summer of 2011, is it possible that the cycle is rolling over?
Our monetary system suffers recurring booms and busts because of the fractional reserve practice of banks, which allows them to create money "out of thin air," as the saying goes. During booms—all of which are caused by too much money that banks have created by expanding credit—financial assets outperform, but they eventually become overvalued relative to tangible assets. The cycle then reverses. The fractional reserve system goes into reverse and credit contracts, causing a lot of promises made during the good times to be broken. Loans don't get repaid, unnerving bankers and investors alike. So money flees out of financial assets and the counterparty risk these assets entail, and into the safety of tangible assets, until eventually tangible assets become overvalued, and the cycle reverses again.
So for example, the boom in financial assets that ended in 1967 led to a reversal in the cycle until tangible assets became overvalued in 1981. The cycle reversed again, and financial assets boomed until the popping of the dot-com bubble in 2000. We are still in the cycle favoring tangible assets, but there is no way to predict when it will end. We know it will end when tangible assets become overvalued, but as John and I explain in The Money Bubble, we are not even close to that moment yet.
You cite the "shrinking trust horizon" as one of the long-term factors that will drive gold higher. Can you explain?
Yes, this is an important point that we make. Our economy, and indeed, our society, is based on trust. We expect the bread we buy from a baker or the gasoline we buy for our car to be reliable. We expect our money on deposit in a bank to be safe. But if we find the baker is putting sawdust in our bread and governments are using depositor money to bail out banks, as happened in Cyprus last year, trust begins to erode.
An erosion of trust means that people are less willing to accept the counterparty risk that comes with financial assets, so the erosion of trust occurs during financial busts. People as a consequence move their wealth into tangible assets, be it investments in tangible things like farmland, oil wells, or mines, or in tangible forms of money, which of course means gold.
Obviously, gold has been in a painful slump since the summer of 2011. What near-term catalysts—let's say in 2014—could wake it from its slumber?
We have to put 2013 into perspective, because portfolio management is a marathon, not a 100-meter sprint. Gold had risen 12 years in a row prior to last year's price decline. And even after last year, gold has appreciated 13% per annum on average, making it one of the world's best-performing asset classes since the current financial bust began with the popping of the dot-com bubble.
Looking to the year ahead, there are many potential catalysts, but it is impossible to predict which event will be the trigger. The derivatives time bomb? Failure of a big bank? The sovereign debt crisis returns to the boil? The Japanese yen collapses? It could be any of these or something we can't even imagine. But one thing is certain: as long as central banks continue their present money-printing ways, the price of gold will rise over time to reflect the debasement of national currencies. The gold price might not jump to its fair value immediately because of government intervention, but it will rise eventually and inevitably.
So the most important thing to keep in mind is the money printing that pretty much every central bank around the world is doing. The central bankers have given it a fancy name—"quantitative easing." But regardless of what it is called, it is still creating money out of thin air, which debases the currency that central bankers are supposed to be prudently managing to preserve the currency's purchasing power.
Money printing does the exact opposite; it destroys purchasing power, and the gold price in terms of that currency rises as a consequence. The gold price is a barometer of how well—or perhaps more to the point, how poorly—central bankers are doing their job.
Governments have been debasing currencies since the Roman denarius. Why do you expect the consequences of this particular era of debasement to be so severe?
Yes, they have, and to use Rome as the example, its empire collapsed when the currency was debased. Worryingly, after the collapse of the Roman Empire, the world went into the so-called Dark Ages. Countries grow and prosper on sound money. They dissipate and eventually collapse when money becomes unsound. This pattern recurs throughout history.
Rome of course did not collapse overnight. The debasement of their currency cannot be precisely measured, but it lasted over 100 years. The important point we need to recognize is that the debasement of the dollar that began with the formation of the Federal Reserve in 1913 has now lasted over 100 years too. A penny in 1913 had the same purchasing power as a dollar has today, which, interestingly, is not too different from the rate at which Rome's denarius was debased.
After discussing how the government of Cyprus raided its citizens' bank accounts in 2013, you suggest that it's a near certainty that more countries will introduce capital controls and asset confiscations in the next few years. What form might those seizures take, and how can people protect their assets?
It is impossible to predict, of course, because central planners can be very creative in coming up with different forms of financial repression that prevent you from doing what you want with your money. In fact, look at the creativity they have already used.
For example, not only did bank depositors in Cyprus lose much of their money, much of what was left was given to them in the forms of shares of the banks they bailed out, forcing them to become shareholders. And the US has imposed a creative type of capital control that makes it nearly impossible for its citizens to open a bank account outside the US. Pension plans are the most vulnerable because they are easy to get at. Keep in mind that Argentina, Ireland, Spain, and Poland raided private pensions when those countries ran into financial trouble.
Protecting one's assets in today's environment is difficult. John and I have some suggestions in the book, such as global diversification and internationalizing oneself to become as flexible as possible.
You dedicated an entire chapter of your book to silver. Which do you think will appreciate more in the next year, gold or silver? How about in the next 10 years?
I think silver will do better for the foreseeable future. It is still very cheap compared to gold. As but one example to illustrate this point, even though gold underwent a big price correction last year, it is still trading above the record high it made in January 1980, which was the top of the bull run that began in the 1960s.
In contrast, not only has silver not yet broken above its January 1980 peak of $50 per ounce, it is still far from that price. So silver has a lot of catching up to do.
Silver is a good substitute for gold in that silver, too, can be viewed as money outside the banking system, which is an important objective to keep wealth liquid and safe today. But silver may not be for everyone, because it is volatile. This volatility can be measured with the gold/silver ratio, which is the number of ounces of silver needed to equal one ounce of gold. The ratio was 30 to 1 in 2011, and several months later jumped to 60 to 1.
So you can see how volatile silver is. But because I expect silver to do better than gold, I believe that the ratio will fall to 16 to 1 eventually, which is the same level it reached in January 1980. It is also the ratio that generally applied when national currencies used to be backed by precious metals.
Besides gold, what one secular trend would you be most comfortable betting a large portion of your nest egg on?
Own things, rather than promises. Avoid financial assets. Own tangible assets of all sorts, like farmland, timberland, oil wells, etc. Near-tangibles like the equities of companies that own tangible assets are okay too, but avoid the equities of banks, credit card companies, mortgage companies, and any other equities tied to financial assets.
What asset class are you most bearish on?
Without any doubt, it is government debt in particular and more generally, government promises. They have promised more than they can possibly deliver, so a lot of their promises are going to be broken before we see the end of this current bust that began in 2000. And that outcome of broken promises describes the huge task that we all face. There will be a day of reckoning. There always is when an economy and governments take on more debt than is prudent, and the world is far beyond that point.
So everyone needs to plan and prepare for that day of reckoning. We can't predict when it is coming, but we know from monetary history that busts follow booms, and more to the point, that currencies collapse when governments make promises that they cannot possibly fulfill. Their central banks print the currency the government wants to spend until the currency eventually collapses, which is a key point of The Money Bubble. The world has lost sight of what money is.
What today is considered to be money is only a money substitute circulating in place of money. J.P. Morgan had it right when in testimony before the US Congress in 1912 he said: "Money is gold, nothing else." Because we have lost sight of this wisdom, a "money bubble" has been created. And it will pop. Bubbles always do.
http://truthingold.blogspot.com/2014/02/golds-message-to-market.html
FRIDAY, FEBRUARY 14, 2014
Gold's Message To The Market
Let’s put this into perspective. When did anyone in the mainstream media say gold was a great investment? What you are hearing is a huge bias not borne out by the facts. - Robert Wiedemer, "100% Fake Recovery" LINK
Gold has been the best performing asset since the Fed tapering began on December 18th, 2013. Most analysts were, and many still are, calling for gold to hit $875 this year. How they arrived at that conclusion is beyond rational comprehension, given that if gold stayed below $1200 for any length of time most gold mines would be shuttered. Moreover, almost every bearish Wall Street analyst never even considers the enormous amount of gold being accumulated by China. I don't understand how these people can call themselves professionals when they are ignoring two obviously fundamental variables affecting the price of gold.
As we know, belief without evidence is nothing but faith. It would seem to me that Wall Street is exercising bad faith in their assessment of the gold market.
At any rate, the fact and evidence stands that gold has been outperforming everything since mid-December. One reason for this is that the Fed and the bullion banks have been forced by the sheer size of the demand from Asia to "retreat" from the unprecedented manipulation of the price of gold over the last 2 years. The reason for the "retreat" is to let the price of gold rise in an attempt to slow down the massive demand for physical gold.
But there are several fundamental reasons that investors now perceive gold to be undervalued, especially relative to the U.S. stock market. First, there's no question now that the U.S. economy is rapidly slowing down. Auto, retail and home sales are declining and it's becoming clear that the cold weather/dog ate my homework excuse is not cutting it. Again, when you look at data available that Wall Street and CNBC conveniently overlook, it's pretty obvious that the majority of Americans are cash strapped, have piled on new debt and are living from hand to mouth. I doubt 99%'ers are going to be rushing out this year to buy a new Lennar home and a shiny BMW for the driveway.
Because of this, it is probable that Janet Yellen will have to reverse the taper and start printing even more money than the $65 billion/month being printed after the first two tapers. Let's not forget, taper or not, the Fed is still printing at a rate of $780 billion per year. In addition, assuming Stanley Fisher is confirmed as Yellen's partner in crime, we can expect to see them implement a negative Fed funds rate policy. Most people are unaware of this, but Fisher is a huge academic proponent of negative interest rates as a means to try and stimulate economic growth (Israeli-born, he was an economics professor at the University of Chicago and at MIT before going on to try and destroy the world with his ideas). Furthermore, Janet Yellen launched her bid to replace Bernanke with a speech in early 2012 advocating negative rates to stimulate employment.
For the record, negative interest rates are gold's rocket fuel.
Finally, I find it curious that very little attention has been paid to the fact that the Government is now operating until March 15, 2015 without any debt ceiling limit. Quite frankly, there should be outrage from both the media and the public. No one seemed to even notice. But letting the Government go for a year without ANY spending restraints is the equivalent of letting a multi-convicted pedophile operate a daycare center that has a sleepover option for parents who travel a lot.
In my view, unlike most mainstream investors, the smart money buying gold did happen to take notice of the unlimited credit card that Congress just gave the Obama Government. It actually became obvious last Friday to those few of us who do follow the news that affects our system that Boehner's House would pass a "clean" debt issuance extension. Since last Friday gold is up $57, or 4.5%. The GDXJ junior mining stock index is up 14%. In comparison, the S&P 500 is up 2.6%.
Things are going to start to really unravel in our economic and political system this year. As the underlying conditions deteriorate expect the Orwellian "things are getting better" lies to intensify. Try to enjoy what you can, while you can because life will likely become a lot more difficult for most of us this year.
No comments:
Post a Comment