Silver Backwardation According to LBMA
This entry has been posted at both SILVERAXIS and METAL AUGMENTOR. Detailed follow-up will be provided for subscribers.
I’ve been trying to cross-examine the backwardation in silver noted over the past few days according to the LBMA (http://www.lbma.org.uk/?area=stats&page=sifo/2009sifo) without luck so I’m going to assume it is correct. Is this something to get excited about? The jury is still out. For now, the COMEX is still showing a very slight contango in silver (gold as well). Bullion dealers in the U.S. appear to have some supplies with no noticeable increase in premiums in the past few days. As a result, I believe this is a London-centric phenomenon for now.
The LBMA silver backwardation may very well be tied into the premium over net asset value (which I refer to as backwardation as well) noted in the ETF basis (SLV) last week. Both the ETF and LBMA basis moves started about the same time. You’ll note that the ETF acquires its silver in London. You’ll also note the particularly severe financial smacking that the UK suffered recently. As a result of the financial tumult, I surmise there was an intense demand for physical gold and silver in London over the past few days.
Support for a London-centric source of the backwardation is that LBMA gold has not gone into a similar backwardardation. In fact, LBMA gold has been moving further and further away from backwardation during the past few weeks, a trend that continued up to yesterday. My general understanding is there is less available supply of silver measured in dollar quantities at the current price compared to gold, which would explain the divergent behavior between the gold and silver basis. It is also possible that there has been some central bank gold selling in London (the central banks don’t have silver). We’ll soon find out if that is the case when the next ECB gold sale figures are announced.
If the observation of the premium build in the ETF and the silver backwardation in LBMA are based on the recent events in the UK, there is a potential implication for the price as I’ll try to outline later. In short, what looked like a breakout could end up failing if the intense demand turns out to be shortlived.
Another possibility that we should consider is that something truly big is really happening here. Even if it is related to financial events in the UK, it might have much more widespread implications. Professor Fekete has long felt silver might be the first to go into backwardation. Although he didn’t articulate a reason for this, my explanation is that silver tends to be more sensitive to supply and demand changes because it is a less liquid market.
TOM…..Good to have you and the blog back. I would say, if by chance the LBMA was based in ICELAND, we would already have SEVERE BACKWARDATION. As the UK BANKING SYSTEM implodes towards nationalization….it is showing up in the robust buying of silver. As you state, banks don’t have silver.
Roubini being at DAVOS might give the CENTRAL BANKERS some hope that a “SMARTER WAY” to deal with the BAD BANK ASSETS is instore. Roubini being more intelligent than the rest, allows him to FLOAT to the top of the CENTRAL BANKERS TOLIET BOWL. Unfortunately, the best and most capable captain could not save the TITANIC.
Presently, there is DEBATE on the financial networks on how this GOOD BANK, BAD BANK will deal with the BAD ASSETS on the balance sheets. If the govt pays too much its not good for the tax payers. If they underpay, the banks go BELLY UP. This is a LOSE-LOSE situation.
If UK disintegrates further, we will see a continuation of backwardation in SILVER….and at some point possibly the same in GOLD. As the Disintegration of the BANKING SYSTEM spreads to the United States, this will occur on the COMEX.
To RECAPITALIZE the banks is as Jim Willie states, is like trying to INFUSE BLOOD into a DEAD BODY. It matters not if you try to infuse a pint or 100 gallons of blood, the heart is dead and the pump is no longer working. Even if the GOOD BANK, BAD BANK is used to take off these bad assets, the economy is imploding…who is going to LOAN MONEY as housing prices continue to decline, Auto sales continue to collape and unemployment hits 1 million plus a month.
Many Analysts say this might be like the 1930’s, 1970’s or 1990’s in Japan. But these same analysts are thinking inside a VACUUM. They are using decades old FUNDAMENTALS of the US DOLLAR and ENERGY. It is like using WW1 technology and strategy to win WW2.
I believe, as this system DISINTEGRATES, it will pick up speed. As systems move towards an exponential outcome, the results increase exponentially. Nothing can stop it, until it reaches Equilibrium. The problem is not RECAPITIALIZATION of BANKS….but the OFF BALANCE SHEET DERIVATIVES MONSTER.
Tom’s recent post on MISH’s attack on PETER SCHIFF was quite interesting. Mish also thinks in a VACUUM. Sure DEFLATION will still be a factor in WORTHLESS ASSETS. They were BUBBLES….and they will continue to implode. But energy, commodities, food and precious metals will INFLATE….especailly in the UNITED STATES. The United States can not afford to trade FOREIGN GOODS for REAL GOODS. We are a LEECH and SPEND ECONOMY. To change to an EXPORTING CREDITOR NATION would be a MIRACLE.
We must remember…..farmers could dump milk in the ground back in the 1930’s when prices fell….and survive. Most of the Milk Dairies were small, independent and spread throughout the cities and country. Today, most Dairies are LARGE and if prices fall, then these business go BANKRUPT as they need a certain amount of money to pay large numbers of employees and etc. This is the same with OIL, and NATURAL GAS.
We are in different times compared to the 1930’s. If delfation continues, so will supply destruction. Here in the United States, we are like the large Dairies which need a certain amount of money to function. If prices continue downward, the country will DISINTEGRATE as it needs a certain amount of energy to function. This is the very THING that most analysts fail to realize.
SRS fella
Missed you fella. Now while we were both away I was wondering how things/people change. I remember not long back you were with me arguing in favour of hyperinflation. Now, that seems to have changed for ever.
You give more credit to Roubini than he deserves. I used to strut his blog arguing with people like London Banker. I was a lone gold bug among those “intelligent” deflationists. And believe me, I left in frustration.
I see a ray of hope when you say that gold, energy, commodities & food will “inflate”. But dear, how is that possible with a disintegrating/deflating society? Social disintegration would follow the destruction of money. And with that everything would go down.
Except perhaps the toilet paper.
Hello SRS, I’m heartened to see you back to commenting so quickly!
You are absolutely right that a major source of future inflation, and potentially hyperinflation, might be the supply of raw materials drying up as companies go bankrupt or decide to severely curtail production to limit losses. This is most likely to happen in industries where the production decision is highly dependent on the market price — agriculture, energy, mining, etc.
This theory certainly deserves way more attention especially since it is very likely to have contributed significantly to the stagflation of the 1970s. They called it “supply shocks” back then. Oil, corn, wheat and many other commodities experienced various natural and manmade “disasters”. Of course, there were geopolitical contributing factors that made these events less than coincidental and I’m fairly certain we’ll have some repeat episodes in the years ahead. I kind of like the cliche “when it rains, it pours” to describe the apparent compounding of bad news on top of bad news.
In addition to the supply destruction, I still very much would like readers to consider the impact of competitive currency devaluations especially if these are accomplished by acquiring, or attempting to acquire, (relatively) cheap foreign goods. I would note that the 1970s had elements of this as well. The very reason that Nixon closed the gold window in 1971 was because foreign countries, particularly France, were “purchasing” so much Treasury gold under the Bretton Woods system that the coffers were about to be laid bare.
Another inflationary pressure that I mentiioned in the Schiff article is also important: the Fed being forced to acquire Treasuries in order to keep long term interest rates low at the same time that banks may start to lend out some of the $800 billion of newly created base money. That sure seems like a double-barreled shotgun to me given that the Fed would have to risk sending the country deeper into recession in order to control the increase in the money supply. Ain’t gonna happen.
Nice to have this blog again! Thank you for your hints regarding the silver backwardation in London.
The offtake of silver at the COMEX is also quite interesting. Currently, we have about 123Mio Oz. in the COMEX warehouses and the tendency is downwards.
Furthermore, I cannot make any decent sense out of the currency exchange rate. When I look at the Yen over the past two weaks it looks like the Japanese people are withdrawing capital out of the $ and the BOJ is fighting the resulting appreciation of the Yen. Any other explanation for the strange $/Yen movements?
If this is true, what are the Japanese buying with their money, now converted Yen? Not stocks according to the Nikkei. It could be PMs which could explain the backwardation in Gold seen in Tokyo at the end of 2008. Are the Japanese (people) selling Treasury Notes? Any insight here?
Regarding the Bad Banks, the Bailout Measures, and the Stimuli Programs for the economy: If the governments do too much, i.e. print too much many, there will be not effect (positive to the economy) except hyperinflation. Whether the banking system may be revived that way remains to be seen.
DiscreetSilverBug, I agree the BOJ is fighting the appreciation of the Yen. It is probably the combination of Yen carry trade unwinding (many other countries are now approaching the zero rate threshold) and probably some “profit-taking” on US denominated assets, including possibly Treasuries. To confirm the BOJ intervention we should ideally look for a disorderly decline. ABCD pivot analysis places a top in the Yen around the 114 level which is where it has already made a double top. The timing is fairly short for the resolution and there is probably some money to be made taking bets on either side of the 114 level.
Its good to have the blog back. Miss you guys and the interesting debates.
My question: If there are competitive devaluations of all currencies, how will they continue to cap gold. They must surely. Is there a way to maintain their hold on the PM’s or is this the axe that will cut the shackles?
I believe some will use gold as a weapon, embracing it. If there in fact is an international conspiracy among central banks to cap gold, then that conspiracy will be exploited by “rebel” central banks.
IF ?
The devaluations ARE coming, The devaluations are coming!
Gold set a record vs the Euro & British Pound last week
‘they’ may be holding back the axe for now, but looks like
banks are being drained through trillions of paper cuts
Rebels Banks like Mexico w/ Silver & US w/ Gold could pull a global bait & switch. Kinda warms me up to an Amero [minus the NAU NWO]
Firstly, its good to be back to business as usual having returned from my trip to Singapore and i’m delighted to see Tom and you guy’s keeping up the good work on the commentary and debates.
Let me just also straighten out another small matter regarding my full name which i will be posting as Frederico Krugerand from now on previously posted as “Freddy” K.
SRSrocco,
Apology my friend if you did not recieve a postcard from Singapore but
hope this makes ya feel better as it can be added to your DISINITGRATION MENU that is this following RECIPE…..
THE SINGAPORE ECONOMY IS FALLING OF THE CLIFF
THE SHIPPING PORT IS VIRTUALLY AT A STANDSTILL AS MOST OF THE FREIGHT CONTAINERS AND CARGO IS SITTING IDLE ON THE DOCKS.
FREDERICO……COMO ESTAS. ….missed you on this blog….or what was left of it until just recently. Tom took out his BAG OF TRICKS lent from the FED and TREASURY, worked some magic on this BLOG and fixed it. We hope that it will stick together longer than the anything the FED has done recently.
So you say that SINGAPORE is heading down the TOILET. WOW…..there goes the neighborhood. Maybe JIM ROGERS can get cheaper rent now that he’s put all his CARDS on the table in ASIA. I still think Asia will recover before the United States. Let me rephrase that….I think ASIA might not DISINTEGRATE whereas the UNITED STATES will.
Good to have you back….looks like some FUN is starting to come back into the markets. UK BANKS got an ENEMA last week which was shown in the SIFO rates that Tom posted in his article. Looks like we got SILVER BACKWARDATION in the LBMA now that the UK BANKS are heading for NATIONALIZATION.
Furthermore, my FAVORITE CLOWN has decided that 100 BILLION dollar bills are not LARGE ENOUGH. Yes, its true, GIDEON GONO, Gov of the Reserve Bank of Zimbabwe has created his most FINEST WORK….a $100 TRILLION DOLLAR BILL was issued on JAN 16. As Bill Bonner states, Gono goes where no CENTRAL BANKER has gone before. He stands tall as a COLOSSUS of ERROR….an excellent example of how exciting the wonderful world of HYPERINFLATION can be.
Welcome back,
steve
Tom
while you were away, I had quite an argument with SRS about 2009.
I am in the camp which believes that we would see a bottom in markets sometime this year. I am arguing that even though we have quite a bit of deflationary headwinds, Fed monetery expansion & Obama’s trillions would have its effect.
Deflation would not gain a foothold because all the monetary aggregates are chugging along quite handsomely.
Some argue against this citing that the velocity of transactions has seen a steep nosedive. I counteract by stating that velocity has a lower limit - you got to eat, buy gas, buy some clothes, rent an apartment etc. But the monetery presses have no upper limits in a pure fiat system. At some point the Fed would panic, printing money without limit.
OK, you have $50 trillion asset hole? fill it up with a $60 trillion new money. We are fast approaching that point. Markets would smell that with a vengeance, if it hasn’t already figured it out.
Given the magnitude of the issues I don’t think it is possible to predict outcomes in the short term such as 2009. With that said, most markets are forward looking so that stocks will probably signal a bottom in the economy well ahead of the actual turnaround. Similarly, gold will also signal hyperinflation well ahead of time. In fact, it is this quality of gold as a red flag that forms the basis of allegations that gold is actively suppressed by the fiat reliant establishment.
Before we talk about deflation, we must agree on a common definition. There are several, including a contraction of money supply (and credit), falling prices or entrenched decline in economic output.
Clearly we don’t have deflation in the sense that money supply is shrinking. Bank balance sheets are shrinking due to write-offs but that is NOT a monetary deflation even if it is a deflation in credit. The reason is that write-offs do not reduce the money supply but instead leave the money permanently in circulation assuming deposits are guaranteed. In other words, given that write-offs deplete bank capital which must be replaced for the bank to stay solvent, which government is willing to do because it has guaranteed depositors, then debt write-off can actually be seen as inflationary if we look out to the future far enough.
We do have falling prices but so far it is limited to assets (which are not included in the classical definition of “prices”) and commodities. Yet if we look at a bigger picture, we see that all commodities and assets have done is retrace the massive advance they’ve had over the past two years. Just as that advance did not greatly contribute to inflation, the decline should not contribute to deflation. I think this is by far the biggest “miss” out of the deflation camp. If $40 oil is deflationary, why wasn’t $150 oil inflationary? $40 oil is the price from early 2005. As in my other reply above, the problem is people tend to construct markets as rigid and simple. Let’s talk if oil is $5 and real estate is down 90% as that will be deflationary.
Velocity, schmelocity I say. Just about everybody gets the definition or meaning of velocity wrong. The fact is that it cannot be measured directly but only as part of the quantity of money (QOM) equation which can be represented as:
Money Supply x Velocity of Money = Price Level x Quantity of Goods
This leads people to believe that velocity is an independent variable that can be changed. But that is simply not true. Velocity is more like a constant, or more precisely a factorial. We can understand this by realizing that some portion of the money supply is saved and has been withdrawn from circulation. That leaves a WORKING money supply to support all the spending that takes place. As long as that WORKING money supply is large enough, it will not be constrained by structural limits such as transaction clearing time and physical movement of money from location to location. In the modern world, the constraining quantity of WORKING money supply is orders of magnitude less than the current money supply and therefore that component of velocity is a constant.
What is not constant about velocity is a change in the quantity of WORKING money supply; it is impacted by the true savings rate. By true savings I mean an increase in the proportion of total money supply that is physically saved and thus effectively removed from circulation. This of course must take into account any increase in the money supply itself. In other words, what matters is not the absolute money supply but rather the proportion of WORKING money supply to total money supply. Only by realizing this can one put velocity in the proper perspective. And when we can do that, it is then possible to see that for the left hand side of the QOM theory to decrease even though total money supply is increasing, the following must be true:
For every penny of the overall increase in money supply, more than one penny must be saved such that WORKING money supply actually falls.
In other words, money must actually be withdrawn from the economy over the long term as a result of savings even in the face of unlimited fiscal stimulus. Is there anybody out there who can claim with a straight face that this is happening, or that it is likely to happen in the U.S.? If not, then the velocity argument is irrelevant.
When people talk about falling velocity I think they really are talking about quantity of goods falling. In other words, people are buying less. Yet if quantity of goods (on the right hand side of QOM theory) declines while the left hand side (money supply times velocity) remain constant, then according to the QOM theory it must be true that the price level must necessarily rise. Yes, RISE. I know, you’re thinking, “what the %&)(@#?”", but just think about it. The above is shocking to some people but this is precisely what happened during the 1970s. It’s called stagflation.
Of course in a totally free economy based on the gold standard, this would never happen. Velocity (proportional savings) would simply fall. In other words, there would be hoarding in general proportion (or excess) to the decline in the quantity of goods and thus prices would remain constant (or decline). In the case where quantity of goods did not decline in the long term because technological advance was leading to greater productivity, then prices would fall.
BUT, in a fiat system where the money supply itself can be arbitrarily adjusted, it is theoretically always possible to outpace the savings (hoarding) by increasing the money supply at an even faster rate. At a minimum, it should be possible to get the left side of the equation to fall slower than the decrease in the quantity of goods on the right side. Now let me posit that in fact this is precisely what the central banks are trying to do–outpace the rise in savings and/or the fall in quantity of goods. And given they have the tools to do it via the printing press (or its electronic equivalent), it seems presumptuous to me that one can declare deflation, defined as falling prices, to be a serious long-term threat.
On the other hand, if deflation is defined as a decrease in economic output, we have a problem that cannot be solved by throwing money at it. An increase in the left side of the equation cannot be directed solely to one of the two right side components, price OR quantity of goods. To do that would require effective price controls and total cooperation by the general public (no black markets, etc.) but that will never happen while human nature still holds sway. That doesn’t mean politicians won’t try, as they did in the 1970s. The result now, as it was then, is easy to predict: stagflation. Look back at the quantity theory with a proper understanding of velocity and you can see how it works as plain as day.
Let’s sum it all up. Do we or will we have deflation defined as a shrinking money supply, or even falling velocity of money? Absolutely not. Will we have deflation defined as a decrease in price level? It’s a very long shot, but only if velocity (true savings rate) can somehow exceed growth in money supply. In practical terms this would require every penny of fiscal stimulus to be pocketed (including paying off debt) and not spent. Ain’t gonna happen. Will we have deflation defined as a drop in quantity of goods (a decline in nominal GDP)? Sure! But the overall economic result is not likely to look like Japanese deflation where both output and prices fell but rather more like the U.S. during the 1970s when prices rose and GDP was stagnant.
I always thought that I knew a little bit about the mechanics of the Ag/Au price development. E.g. a falling $-index means raising PMs.
But today and last friday the $-index was raising together with the PMs. I conclude that we seem to live in a different world like a few month ago. Could it be that everything, stocks, bonds, currencies, and the PMs are manipulated and that no rules apply any more? Almost all charts look strange, anyway.
This is all looks weird - to me. Certainly, somebody can enlighten me here!?
When gold buying is mostly based on anti-dollar themes, then they move opposite. When gold buying is mostly flight to safety AND fiat continues to be acceptable to the general public, then both benefit from a flight to safety and they can move in the same direction. The problem is that people have a very rigid construct of markets and can’t see that they are infinitely complex. If anything, manipulation will reduce the complexities and make markets easier to fit into a specific understanding. A great example is how stock market bears held for years that whenever the equities dive but it doesn’t turn into a bear market, that’s because the supposed Plunge Protection Team has intervened. Similarly, it is very convenient to reduce the gold market to an observation that whenever the price falls or does not advance it is being manipulated. Well, to me that’s no insight, it’s reflexive, self-serving and lazy.
Very nice to have the old blog back!
News from my neck of the woods.
I am from Western Australia and we are now experiencing a hard landing that has only really started in the last two-three months. We were riding high until the commodity collapse late last year. I am self employed in commercial construction and am fully aware of the risk my profession has at this time. I was literally working around the clock for the last few years and was beating off clients with a stick due to time constraints. I was knocking back work until November last year. Come January it has all collapsed. Since I have been working at an elevated pace I have got through my order book quickly. This week I called every contact I know looking for work and only landed one small government project which will be over in less than a week. The word of the day is cancelled and postponed projects. Every night at the top of the mainstream news are stories of sacked miners and other workers that are about to loose their houses.
Personally I think that the asset liquidation will resume on a global scale sometime after March - April, but as Tom says no one can say exactly what will unfold this year. Since on this nice rebound my window of opportunity to exit the markets and tidy my house is open, I can’t take the risk of another meltdown, since I flew most of last year by the seat of my pants.
My thinking is that the dominant pattern we are seeing is the Kondratieff winter where most debt is liquidated. This time, fiat money is debt so that will ultimately suffer as well. This is clearly on display since no other asset or fiat currency has outperformed gold this decade. We may see inflation however we define it in dollar terms, but I can’t see anything that will beat gold over any length of time. It is my opinion that an economy cannot function any where near its potential when things become so unstable, particularly the monetary unit.
Lone Ranger, Thanks for the personal/location report and hope some work starts to turn up soon (that goes for all of us!) I agree about another asset liquidation wave hitting the markets but it could be sooner than March-April, I’m thinking more like February-March. It is probably going to be very quick and brutal and I believe it is very possible that gold gets taken down to new lows this time around. I have positioned myself for this reason with put options as I’ve described in the Metal Augmentor. As for debt liquidation, it ain’t going to happen to any large extent simply because people cannot afford to do it. There will be more defaults but that is entirely a different matter. A debt default does not reduce the amount of money supply if the government has backed the banking industry and depositors as has been the case in virtually every country.
Peter Schiff hits it back on Mish.
http://www.europac.net/externalframeset.asp?id=15312
“My popularity on television and the internet has led a very small money manager to use his popular financial blog to promote his fledgling business by attacking the recent poor performance of my long-term investment strategy.”
———-
Agree totally.
Ditto Keseri. Peter Schiff hit back with class. score that round to Schiff 4-1!
Ok. Not related, but thought you guys may get a chuckle out of this story.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10554248
THere is even a link to the video
orry for the new thread regarding the patterns in the charts. The old thread contains too much responses to continue it.
I should made myself clearer. For at least four years now I am looking at the long-term and the daily (short-term) charts of the PMs, bonds, currencies, and stocks, namely the DJ. Often I find that these charts combined yield explainable patterns, if one also includes manipulation as reason for certain developments. I saw the sawtooth-pattern in silver in which the downturn clearly suggested that the sharks were hunting the smaller fishes. I saw the “bathtub” pattern in the daily DJ charts which suggested that the PPT was saving the day for some people. For the last few month there has been the attempt to keep the prices of the PMs as low as possible without really returning to the sawtooth pattern - which I assume - was a profitable business.
However, starting a few weeks ago this pattern broke. I first looked like a static warfare between (at least two) parties, starting at a stalemate and slowly developing towards a trench warfare in which one party slowly gains trench after trench (regarding the PMs and maybe some currencies).
One explanation for the PMs is that there is no more profit in provoking a “sawtooth” with a forced sell-off because the counterparties started buying at the downturn and worse - demanded delivery. The next strategy seemed to be a prolonged price suppression which did not work either for the same reasons. It could have worked in an environment where the financial sector would really be stabilized.
As of today the PMs firmly established the “trench warfare” pattern. The corresponding daily chars for Ag and Au show a significant raise at about 10:30 EST (too early for Asian traders ??).
However, don’t ask me to make any sense out of some other charts, expecially the Asian currencies. I understand the reponse given by Silverax regarding the $ and the PMs (two save havens) but I still have a weird feeling that I miss something important. This feeling always comes up stronger when I look at charts of the Asian currencies. In order to even ask the right questions regarding these charts I would need to know about the psychological tenors in these countries. Some expert here?
Are you sure that the financial sector would “really” need to be stabilized, or would it possibly work if some facades were quickly erected to make it look like everything was okay. As in, move along folks, nothing to see here. Obama will have been in office for more than 2 months by the time the end of March rolls around. Compare to FDR. Here is what a liberal adorer pieced together from various sources:
From http://www.huppi.com/kangaroo/First100days.htm
There is of course a lot wrong with this interpretation but the point is this: public sentiment can turn on a dime. The countdown is on for Obama to accomplish something similarly “miraculous” whether by hook or crook. My guess is that gold will not initially like it.
Looks to me like the markets are starting another leg down. Especially the Dow. UPS and Fed Ex were down realy hard friday. We could see some fireworks on the market open Monday if this is the case.
USD is up and Gold is up. Given the issues in the global markets, is the USD becomming the safe paper to hold and gold the safe commodity thus both moving up in tandem?
Tom
You have said that gold & USTs both acting as safe-haven are trading on the same side. This is evident from their daily price action of late. May I add that the institutional fund buying into gold using the ETFs has probably begun.
We have more than 1200 tons of gold into ETFs already. Up by more than 70 tons in two weeks. Is this sign of Fund buying? this guy feels so.
http://news.goldseek.com/GoldForecaster/1233332777.php
“With global pension fund assets estimated at $18.6 trillion by the end of 2005 only a tiny proportion of that amount has entered the gold Exchange Traded Fund market so far. Bear in mind that at $900 an ounce, one tonne of gold costs $29 million, so far. So the 1200 tonnes held in this manner represent only $34.8 billion or 0.19% of these pension funds assets [there are many other types of funds other than Pension Funds as well].”
This can be quite bullish for the price in the longer term but can actually help create a demand vacuum under some circumstances. For one, funds buy on allocation not timing. Another point I haven’t mentioned (partly because it plays into the conspiracy camp) is that should the central banks coordinate a massive reflation, they could very well sell some gold ahead of time. I note the ECB gold agreement is running well behind pace to sell 500 tonnes by September. If this occurs at the same time as a significant (5-10%) liquidation of gold ETF holdings (as has happened before) there would be tremendous pressure on the gold price.
I believe it was Fekete that said it will be Silver that leads the death-baton march. The march being the destruction of the paper paradigm.
I believe over the next 2 months we will get some confirmation on just how bad everything really is. I think we will soon see the debate on whether the USA/USD will survive.
Tom,
Can you write more about your idea for return to gold standard? I can;t add any more questions below your answer, since this was on the end of a long tread. It is clear that the biggest obstacle to such return is the Gresham/Copernicus law. (Of course, other then the interest vested in the fiat system that prevents even talk about return to gold standard at the current stage/gold price). If I understand the “Gresham Law”, its cornerstone is the force of state that ensures that things of a lesser value have to be accepted on par with those of higher value. If you take away that force (repeal all legal tender laws) do you think the dollar would survive even a day? On the other hand, if you still force people to use dollars, wouldn’t there be a run on treasury gold as soon as the gold becomes available in forms of coins free of markups? Also, this dual law — certificate is protected by law, but the real gold can be stolen freely — wouldn’t this be the same as in effect closing the gold window?
I would appreciate your comments, since it is clear you’ve been thinking about those subjects, and know much more then I do.
PolarBeer-
Here’s one way.
Transfer all assets on the fed’s balance sheet to the treasury and set those against the federal government’s unfunded liabilities. Compute the value of the current money supply, and all the remaining unfunded federal obligations. Pretend that’s $16T. Then also figure the banks that need to be liquidated under FDIC conservatorship because they are insolvent. Use Roubini’s number, about $4T. So say it all adds up to $20T. That’s the quanitity of money we need to resolve the bank crisis and fully fund federal obligations. Create that number of dollars, but instead of federal reserve notes, call them gold certificates. So we have $20T. Federal reserve notes can be exchanged for gold certificates 1 for 1. Contracts and current government spending and programs are preserved at the same nomimal dollar amount across the transition from FR notes to gold certificates. Although some contracts may be restructured under force majeure.
From that point forward, the mint is open to gold. Gold can be exchanged for gold certificates, and vice versa. So the only question remaining is: at what price? Divide the $20T by 260 million ounces of gold that the fed currently has (and would be transfered to the mint), and you get a price of $77000 /ounce for gold. That’s the price of gold under the new gold standard.
Prices for commodities will jump at that point, but it won’t be inflation after that; it is just a single devaluation event. The money supply is not fixed. New dollar certificates can be created simply by bringing gold to the mint. There will no longer be fractional reserve banking. Just full reserve banking.
Everybody holding dollars suffers because his dollars are devalued in one brutal devaluation event. The burden of the welfare state is immediately mitigated because the benefits, while the same in nominal terms, in real terms are lower. It’s simple. It’s about as fair as anything is going to be in resolving all this.
As far as I can see there’s no Gresham’s law complication because the “bad” dollars are just as good as the “good” dollars, at 1:1.
Is it a good plan? No, it’s the worst. except for all the others.
I’ll address your questions in summary here and perhaps we can expand on the discussion later.
Yes, Gresham’s law would force out of circulation gold minted free of seniorage as long as fiat money was still circulating. In effect, free mintage would be the equivalent of buying American Eagle gold and silver coins at spot with no premiums. Not only would the government lose a lot of money doing this but none of these coins would enter circulation unless there was hyperinflation. Stated another way, if such coins entered circulation there would be hyperinflation (not necessarily because of free mintage although that possibility cannot be ruled out).
That is why it is necessary to have an intermediate step such as Treasury gold certificates, unless of course it is agreeable that the fiat system should be terminated immediately. Treasury gold certificates can have limits placed on them such that they do not become so preferable as to be hoarded and not spent. For example, banks could be required to maintain capital in the form of Treasury gold certificates, taxes must be paid using Treasury gold certificates, etc. See Jim Sinclair’s commentary at http://www.jsmineset.com for some additional observations.
The “dual law” wouldn’t involve “real gold can be stolen freely”, it would involve real gold being prevented from being used in any contract. To be precise, the law wouldn’t prevent use of gold in contracts, it would just prevent enforceability of such a contract in court. Thus, one party could default on its obligation to pay in real gold and the other party could not sue. As a result, most contracts would be made out in Treasury gold certificates.
Tom…….i agree,
Hard choices need to be made sooner or later so the US treasury Gold and Silver Certificate Program combined with the opening of the USMint still remains the more favourable way to stabilize the financial/monetary system as it provides only solid foundation that will restore confidence and trust although i have to admit it still remains a PIPEDREAM in the short-term.
This will only happen when all the attempted REFLATION policies by the Governments and Central Banks FAIL to fill the HUGE BLACKHOLE left by the FINANCIAL IMPLOSION.
Keeping the ZOMBIE BANKS and MAJOR CORPORATIONS aka.JAPAN alive is also doomed to fail.
The FEDERAL RESERVE MORTUARY or should i say the FEDS UN-BALANCED SHEET STINKS of ROTTING FLESH of the DEAD
(Freddie Mac…Fannie Mae…AIG…Citicorpse…etc)
I’ll say this:
“WHEN THERE’S NO ROOM IN HELL THE DEAD SHALL WALK THE EARTH”
The transmission mechanism i.e. the GEARBOX of the Financial system is broken. The COG WHEELS are badly damaged and have SEIZED UP.Greasing these wheels with more oil AINT GONNA DO JACK neither is pumping more FUEL(LIQUIDITY)into the engine.
But unfortunatly it not stopped the authorities from trying and judging by recent actions by the Governments and the Central Banks we are heading down for a SHOWDOWN by which i mean a GLOBAL TRADE WAR which may possibly MORPH into a WORLD WAR.
Speaking of gold, how about this,
http://www.telegraph.co.uk/finance/personalfinance/investing/4401452/Hedge-fund-to-offer-shares-priced-in-gold.html
Not a bad way to summarize the sorry state of affairs!
Tom and the rest of guy’s i forgot to post these humourous episodes shown on T.V. in the U.K. last year on the financial events so click below to view when you have some spare time.
PART 1. Where Did All The Money Go?
First Broadcast: Sun 2nd November 2008
The satirical four-part look at the global financial system starts with an episode explaining what has gone wrong.
In-Depth Episode Guide
PART 2. The China Syndrome
First Broadcast: Sun 9th November 2008
Where does all the money come from, and what happens if it stops?
In-Depth Episode Guide
PART 3. Till Debt Us Do Part
First Broadcast: Sun 16th November 2008
Rory Bremner asks how we are going to pay the bills in the future.
In-Depth Episode Guide
PART 4. A Modest Proposal
First Broadcast: Tue 18th November 2008
In this final episode, Rory Bremner looks at the new American President and asks what, if anything, he can do to help stop the credit crunch.
Here’s the link for part 1 the other episodes in the series can also be found on the same page:
http://video.google.com/videosearch?q=sillymoney&emb=0#
the US is headed to be a banana or a coconut republic with the growth rate in the monetery base similar to these. These comments and other interesting ones are to be found in the must read FAQ styled prognosis by a retired professor in finance living in NY.
http://www.lewrockwell.com/rozeff/rozeff264.html
The average 60 day Copper price seems to have stabilized to 1.4-1.5 USD/lb level. This has happened while the LME stock had doubled from 20,000 tons to 40,000 tons. Isn’t this a sign of a bottom in copper price? I mean, we are already operating much of the industry below the production cost. How much more can this metal fall?
And if we agree that copper is in the bottoming process while gold (liquidity) is rising fast (v.v.fast to be precise). Isn’t it the first ray of the economic sunshine? am I very much off when I predict that we will see a Dow bottom soon based on Dr Copper and Dr Gold?
What matters is the action of those still holding the roughly 2-3 million tons off exchange (my estimate). Not possible to predict how and when this will resolve but as I’ve recommended before, it might be possible to spot the bottom by looking at historical extremes of contango. I haven’t looked very carefully in copper but we are not there yet. I have been closely following oil and we are definitely not there in that case.
Another way to look at this is that gold may not have bottomed. Here I argue that gold is the LAST to bottom and since oil did so in January then gold is still in the future.
I have taken profits on my gold holdings at $920. I am planning to go short on Monday. I believe that we are in for at least a $70 correction. I just wanted your views. My reasons for going short-
1. For the last week, the dollar and gold do not seem to have that same correlation they once had.
2. The gold stocks have started to lead gold, which has been an advance warning in the past.
3. Gold itself has shown exhaustion signs this Friday.
4. As per the Cot report, the commercials are still not increasing their holdings, it is only speculators who are long. They have done so in a big fashion this week, signalling impending trend change.
5. And last, but not the least, we have had a 250 dollar upmove from 680, without almost a break. This is next only to the big move we witnessed last year. 350*61.8=217. So, as per the Fibonacci ratios, we are encountering a major resistance at $930. You know, as per the Gann theory, major resistance brings forth major correction, so we are looking at a correction of anywhere near 70 to 120 dollars.
There are more arguments that I can offer, that are more fundamental in nature.
1. Gold price reacts to a)demand-supply, b)as an inflation hedge c)as a currency or a medium of exchange.
a) does not have the power to exert such huge price swings. b) can be done away with for the present, because the commodities have all tanked.
c) Gold is acting as a currency, since all the currencies are being deflated, and hence gold is rising in value.
It is this aspect which is making gold rise, and will determine its price in the future. I am in the process of collecting data of how much a currency has risen in the past, and by how much. I have tentatively found that currencies rise at the most by 25% in a year. Gold has risen by more that amount in 3 months. To say that this price of gold does not have speculation built into it, would be to ignore the reality. That gold has not risen to a new high against dollar, which is holding relatively well, but against euro, Indian rupee, and other currencies, reinforces my view.
Everyone is saying that Obama package might get the credit flowing once again, through the good bank, bad bank theory. If that happens, all the currencies in the world might get a boost, and that will end the role of gold as a currency for the time being. Gold might get into inflation hedge once again, but this is potentially the time for game changing events. I don’t think anyone can know about the outcome beforehand, and if I were a big speculator bidding up the price of gold, I would take my profits here.
That is why, I believe, we have to be cautious here. Also, there is a body in the US which has diligently chronicled all the cycles that are there,( I forget the name), and it is they who have mentioned this cycle of precious metals.
Anyways, there are four factors, that I follow in my financial analysis-
1. Fundamentals,
2.Technicals,
3. Sentiments
4. Elliot wave analysis.
1 and 2 I have discussed, 3 is highly bullish now as per the Mark Hulbert Index( this of course works as a contrarian indicator). I am no authority on Elliot wave analysis, and it is complex at best, but, now everybody is saying in India that Gold can never come back to its 2006 levels. This is mass psychology for you, on which EW is based, and that is always a big contrarian indicator. There is a confluence of various factors, that makes me think that a careful review is now at hand.
TGupta
Ignore all kinds of technical analysis like Elliot wave for the gold market. In fact if the TA guy is bullish that is a fundamental reason to be bearish. Reason is gold is a small market and the majority of the funds and the public are still blissfully unaware of the excellent diversification & stability it provides. Now some funds are getting warmed up with the ETFs. Witness the fireworks now.
If you have sold your gold at 920$ alright, good for you - you made some profit. But avoid shorting it. You haven’t seen a gold fever yet. and when you will witness one, you would be blown over by your shorting antics.
And when you say currencies have risen by a max 25% in the past I have one thing to say - have you seen the Fed doubling the base money in a few months? These are unprecedented times, child and they demand an unconventional approach. Not your rear view mirror empirical methodology.
You maybe right about the gold correction in the near term. But then you could have been right by being doubly wrong like 2 wrongs make a right. better flip a coin.
The LBMA SIFO rates are showing a slight contango in the 2 month rate, but an increased backwardation in the furthest months, especially the 12 month rate:
2009 SIFO (Silver Forward Mid Rates) and LIBOR Means
DATE……. 1 Month 2 Months 3 Months 6 Months 12 Months
27-Jan-09 -0.24429 -0.23000 -0.20857 -0.09143 -0.13000
28-Jan-09 -0.37000 -0.32833 -0.24833 -0.17500 -0.18200
29-Jan-09 -0.35667 -0.32833 -0.30667 -0.19000 -0.15667
30-Jan-09 -0.37000 -0.34167 -0.25167 -0.18000 -0.14500
02-Feb-09 -0.16000 -0.17400 -0.13000 -0.05000 -0.02000
03-Feb-09 -0.26500 -0.27333 -0.14000 -0.06500 -0.00800
What is interesting to note is the 12 month rate. Its now .008 compared to 0.27857 on Jan 2, 2009. This is approx a 98% drop in the 12 month rates in only 1 month.
Good article the puts all these numbers together is:
Silver in Backwardation; Has the Last Cantango Been Danced in Washington?
Silver for all traded futures contracts (whether 1 month or 12 months) have been in backwardation for seven trading days since January 21.
This backwardation is about three times more severe than the mild backwardation than existed from December 8 through December 24 in 2008.
We can see that since 2006-2007 where rates were about 4-5%, this state of backwardation is fairly unusual. (The LBMA only lists data back to 2006, but I believe it is a fair comment to say that on an even longer timeline, this is unusual.)
Furthermore, starting in roughly June 2008, the 12-month SIFO rate flipped over from being the lowest rate to, in general, the highest.
Also, the disparity between the rates seen in 2006-2007 has largely disappeared; the market appears to be treating a trade on silver 12 months later as quite similar to a trade on silver 1 month later.
http://seekingalpha.com/article/117860-silver-in-backwardation-has-the-last-cantango-been-danced-in-washington
The charts on the article are excellent.
I can’t tell what I’ve read and what I haven’t.
Yeah, the experiment with nested threads is officially over. I have modified it so only the original comment can be responded to, although that will still place some new comments lower on the page. If that doesn’t work, I will modify it again. I’ve also revised it so later comments appear at the bottom. At least that way there is a minor chance of being able to follow the discussion as it progresses. Unfortunately this screwed up the order of all the posts so they are now seemingly random. Oh well, hopefully this will get fixed on the next set of comments.
TOM,
It looks like silver has gone into BACKWARDATION again in all the different month rates. According to the LBMA SIFO RATES;
LBMA SIFO RATES
DATE……. 1 Month 2 Months 3 Months 6 Months 12 Months
29-Jan-09 -0.35667 -0.32833 -0.30667 -0.19000 -0.15667
30-Jan-09 -0.37000 -0.34167 -0.25167 -0.18000 -0.14500
02-Feb-09 -0.16000 -0.17400 -0.13000 -0.05000 -0.02000
03-Feb-09 -0.26500 -0.27333 -0.14000 -0.06500 -0.00800
04-Feb-09 -0.34167 -0.30000 -0.14167 -0.06667 -0.03000
TOM, what is the significance of a NEGATIVE LEASE RATE. Both Gold and Silver Lease rates on the LBMA have been heading down in the past year. When the US TREASURY AUCTION tried to get buyers back in DEC and the rates for 3 month Treasuries acutally went NEGATIVE, this meant that the investors were actually paying the GOVT to buy their DEBT. Is it the same thing with a NEGATIVE LEASE RATE in SILVER?
steve
Going back into backwardation in silver is a sign of substantial physical demand. Someone is buying in a major way and I note Friday’s price action in silver is good corroboration of that. There is buying of most other metals as well with copper doing particularly well. It is possible that the buying is related to some type of restocking that is taking place after a complete lack of inventory building over the past few months.
The meaning of a negative “lease” rate is that metal lending is not generating a return. It is somewhat analogous to negative Treasury yields in that parties may wish to continue “leasing” even without receiving net fees because they can still avoid paying storage and insurance costs. That’s like people willing to put money into Treasuries (short-term only of course) simply to preserve capital. Another important point about negative “lease” rates is the finite limit of how far negative they can go–once storage, insurance and other incidental costs are covered, there is a strong tendency for “leases” to not get rolled over. The result is upward pressure on “lease” rates.
In regard of door number one and the sacrificies which were discussed, Silverax, it will be not only the savers who will be hit hard by the deliberately induced (hyper-) inflation. The other losers will be the people on fixed income with no inflation adjustments like public/government pensions. These people still seem fit enough to start riots in the streets when they become aware that they were betrayed in a horrible manner.
I agree that every saver should at least hold 5-10% of the saved wealth in gold. This would make door number one a smoother path to the necessary cures and might even get the cure going.
Of course, the other people which are betrayed will be the foreigners which hold $-nominated debt titles. Whilst the local people start riots the others might start a real war. Uch, now I sound like the doomsayer here.
It looks like the debtor nations also
pretty significant drop in reserves balances with the Fed this week. Indication of money escaping the updraft?
Steve, See my new commentary today (Saturday the 7th).
I used a site traffic analyser at the following site
http://www.quantcast.com/silveraxis.com
The verdict is “The site attracts a largely male, college educated, teen, fairly wealthy audience.” Monthly average traffic is 4600 which means 150 visitors per day.
When this number becomes 150,00 to 150,000 visits per day I will sell my silver.
keseri, those stats are way off but you make a really good point!
I used the site traffic analyser on silveraxis.com
guys read this interesting piece.
http://mises.org/story/3281
The Insolvency of the Fed
Philipp Bagus and Markus H. Schiml | Posted on 2/5/2009 12:00:00 AM
Excerpts
“Yet, has the Fed really “run out of ammunition”? First of all: what is the Fed shooting at? It is trying to artificially stimulate the economy with its monetary policy, thereby it is also unwittingly shooting at the value of the currency. Through its monetary policy, the Fed is trying to bail out an insolvent and illiquid banking system to maintain an unsustainable structure of production. As long as the currency is not totally destroyed, the Fed will never run out of ammunition. In order to assess the ammunition left, one should have a look at the balance sheet of the Federal Reserve — especially at the assets the Fed can still obtain. The Fed’s balance sheet also gives insights on the condition or quality of the dollar.”
“Since the crisis broke out, the Fed has continuously weakened the quality of the dollar by weakening its balance sheet. In fact, the assets the Federal Reserve holds have deteriorated tremendously. These assets back the liability side of the balance sheet, which mainly represents the monetary base of the dollar. The assets of the Fed, thereby, hold up the value of the dollar………..”
“Despite of all these efforts, credit markets still have not returned to normal. What will the Fed do next? Interest rates are already practically at zero. However, the dollar still has value that can be exploited to keep the experiment going. Bernanke’s new tool is the so-called quantitative easing. Quantitative easing is when a central bank with interest rates already near zero continues to buy assets, thus injecting reserves into the banking system. In fact, quantitative easing is a subsection of qualitative easing. Qualitative easing can be defined as the sum of the policies that weaken the quality of a currency.”
“In the analysis of the Fed balance sheet and the condition of the dollar, another detail is extremely important. The equity ratio in the Fed balance has fallen from about 4.5 to 2%.This figure implies an increase of the Fed’s leverage from 22 to 50. As we have seen there are large new positions of dubious quality on the Federal Reserve balance sheet. More specifically, should only 2% of the Fed’s assets go into default — or if there is a loss in value of 2% — the Fed becomes insolvent.”
“The other possibility is concealed in the hidden reserves of the Fed’s gold position, which is only valued at $42.44 per troy ounce on the balance sheet. A revaluation of the gold reserves would boost the equity ratio of the Fed to 12.35%.It is ironic that in troubled times a revaluation of the “barbarous relic” could save the Fed from insolvency. Yet, this would only be an accounting measure and would not change the fundamental problems of the paper dollar. While shooting its last bullets and weakening the dollar, the Fed is outmaneuvering itself. The end of the experiment is getting closer.”
———————————
And yet intelligent people like Fekete make a case for deflation or a deflation & a weak dollar combine. Both these scenarios are highly improbable given the fundamental state of affairs at the balance sheet level.
It would be advisable to buy gold when the Dow finally bottoms.
My commentary posted today addresses some of this — up to 40% of the increase in the Federal Reserve balance sheet turns out to have been currency swaps. That is a pretty big deal with significant implications. Also both the Mises article and Prof. Fekete haven’t considered what will happen if and when the Fed starts to buy Treasuries in earnest.
Keseri…..welcome back to the Intellectual RIFF RAFF….lol. I believe you have made incorrect assumptions from my posts. I only give ROUBINI credit as he is smarter than the other NIMWITS. His theories for getting us out of this BLACK HOLE are still believing a GOOD CAPTAIN can keep the TITANIC from sinking.
I have always thought we would have DEFLATION and INFLATION at the same time. Why? Peak Oil is still a problem…more than ever. The US SUBURBAN INFRASTRUCTURE cannot survive this kind of energy collapse….regardless of the present lower price of energy. So suburbs, strip malls, shopping malls, large supermarkets and etc will implode as time goes by. Thus this is the DELFATION.
But…and I say But,….real good will INFLATE. Even though our economy will COLLAPSE, many other countries will adjust. Thus, at some point…REAL GOODS will be traded for REAL GOODS and not worthless FINANCIAL INSTRUMENTS, whether they be FRANKENSTEIN DERIVATIVES of MONOPOLY DOLLARS.
This is where INFLATION will KICK in BIG TIME. This is WHEN THE WORLD WILL GO GONO. ANd by GONO, I mean Gideon Gono, Gov of Reserve Bank of Zimbabwe. Mr. Gono was going to resign on Sept 18, 2008 but decided to stay on to become a figure not to be BEAT in HUMAN HISTORY. Mr Gono’s most recent work has been the issuing of 1,10, 100 BILLION DOLLAR BILLS. This was quite impressive, but only practice for something even more GRAND and EXCITING.
Yes, on JAN 16, the RESERVE BANK OF ZIMBABWE issued its first $100 TRILLION DOLLAR BILL. At the time of issue, it was worth $300 US DOLLARS. I imagine if someone was smart enough to own gold, they would enjoy this HYPERINFLATION ENERTAINMENT.
Regardless…..ICELAND’s GOVT has finally collapsed giving us a GOOD FRAMEWORK for things to come. UK is close to Nationalizing their BANKS. This should give the United States an excellent source of wisdom to do the same. As practice makes perfect. We cannot forget the famous saying…..STUPID IS….STUPID DOES.
I am still 100% on INFLATION coming down the PIKE…but I never said INFLATION for everything. Shortages in the United States are coming. High Level Suits and Ties in the GOVT might be able to BAMBOOZLE the rest of the world by Printing money…but this is a LAST DITCH EFFORT for survival. Think of it in this matter:
A war is being FOUGHT and the USA does not have enough men to fight the battle. So what do they do?? They decide an EASY WAY OUT is to PRINT UP PAPER CARDBOARD SOLIDERS and prop them up in the battlefield. To the ENEMY, it looks like an OMINOUS SIGHT. Even though this STRATEGY might win a few battles….in the end the CARDBOARD SOLDIERS cannot fire weapons…..just as the FED and US TREASURY cannot print GOLD and SILVER BARS as well as BARRELS OF OIL.
Make sure and buy your TICKETS (GOLD & SILVER) to the greatest show on earth……THE WORLD GONE GONO.
I would like to point out that the U.S. has some options to deal with the disaster and by that I mean utilizing the Treasury gold in some combination with opening the mint to gold. Now I don’t think it will be a full opening but as I’ve stated in the past it wouldn’t be a big deal at all for Congress to invoke the anti-gold clause while making an exception for “Treasury gold certificates”. This would drive some gold to the Treasury in exchange for instruments which are officially recognized in contracts and would be a rather mild form of confiscation in comparison to the alternative. The Treasury (hopefully) holds around 260 million ounces of gold currently and could perhaps hope to double that in a relatively short period of time under a “Treasury gold certificates” program combined with an anti-gold clause. That’s $500 billion at $1,000/oz. per gold and clearly that isn’t going to do it. At $10,000/oz. it looks better ($5 trillion) but arguably still falls short. Mind you this is at current debt levels which are still increasing despite the “debt contraction” crowd saying otherwise. Still, numbers above $10,000/oz. start to lose all credibility simply on account of all those trailing zeros, so let’s not go there.
I think that the BOJ already lost the war. If you look at an ultra-long Yen chart, the Yen decisively broke above a 10 year consolidation triangle when it broke above 100. Overhead resistance now at 120 (panic of 1995).
I believe the Yen has embarked on a new bullmarket, as has the Nikkei. A bear market of 25 years is as long as it gets.
“Anti-gold clause”?
Why would gold flow to the treasury in exchange for certificates? Where is it coming from? Private hands?
I don’t think foreign governments would want to sell one gram of gold for another paper certificate from the US.
Sorry but paper (and plastic) will always be around in the future. It’s not like people will switch to exchanging physical gold. When choosing paper, it is a choice between evils and you go with the least evil. If not the U.S., then who? You think people will exchange gold for paper certificates issued by China, Russia, Brazil? Maybe the Swiss or Germans. And yes, some gold would flow to the Treasury from private and foreign hands because “Treasury gold certificates” would be 100% backed by gold and valid for transactions whereas contracts involving physical gold would not be enforceable. You might not want these certificates but that doesn’t mean others won’t. Another thought is that taxes might have to be paid using gold certificates.
Good Point Tom. I just wanted to reply to see how small the next reply window would look like.
Silverax,
ever heard of a guy named “De Gaulle” and green pieces of paper backed by gold? If so, you know the rest of the story…
THIS IS REALLY SILLY
The Yen appreciated by 30% in 2008 against a basket of currencies so there is your bull market. Meanwhile, Japan has the most bearish outlook for the domestic economy out of the G7. GDP forecast for FY09 and FY10 is more deflationary than the worst years of the 90’s. Japan is also the most export dependent of the developed countries and its key industries, auto-computer-electronics, are likely to contract radically as exports collapse. Virtually all raw materials need to be imported. Japan has among the largest public debt to GDP ratios at 170% which approaches Lebanon and Zimbabwe. This might grow to 400% before it is all over. In summary, upside in the Yen is technically possible but there is a better chance the fundamentals will knock it over a cliff.
I set it to 10 maximum replies
So this should be the last one
The Japanese bear camp is VERY crowded. I bet that almost no one is invested in Japan, nor holding its currency.
Tom
Very heartening to see you post so often. Don’t mind some of the caustic stuff that we throw at you at you. heart o hearts, we miss you when you remain busy doing other stuff. everything we spin, even our usual rhetoric is meant to bring out the best in you. and are you consistent, man!
I agree about your comments on paper. even toilet paper has its uses. i mean, you can use it to clean yellow stuff early in the morning. gold is absolutely useless in this regard.
The liquidity offered by paper is something which physical gold is devoid of. That would keep the paper factories rolling.
Let me repeat, there will never be a gold standard adopted by a major country that is based on physical coins unless the Professor is right and we go back to the Dark Ages (odds of that in my opinion is less than 1%). That didn’t work for even the simplistic financial system that existed 100 years ago. To solve the “De Gaulle problem”, Treasury gold certificates could not be recognized outside the U.S. and there would be no redemption (gold certificates could not be exchanged for gold itself).
Sometimes contrary investing doesn’t work. Wonderful examples can be gleaned from the Great Depression and from Japan itself during the past 20 years. One thing I find fascinating about people who think we are entering a more militaristic period of human history after the “pax Americana cum nuclear detente” of 1945 to 2??? is that they also think two of the most militarily neutered countries, Germany and Japan, are somehow going to maintain their economic might in such an environment. Try this on for size: IF China becomes the dominant Superpower in the next 50 years, it WILL invade and take over Japan. Also, if the Eurozone remains a viable unit for the next 50 years, it WILL gobble up Germany as an independent state as it pertains to foreign affairs (the center of power will shift to the East to counter Russia). If the United States (Empire) can be compared to the Roman Empire and both are apt to fail in the same manner, then “losing” influence over Japan and Germany (the U.S. vanquished both militarily, which is the source of ongoing hegemony) is similar to Rome’s withdrawal from Dacia and later Britannia before the Empire collapsed.
Tom…..I agree with much of your reply. Yes, it is true, Manipulation isn’t everything. And of course not every car accident in the United States was planned by the CIA, but some are.
But Tom, you have to realize the US DOLLAR isn’t worth the ink printed on it. Furthermore, for the United States to keep getting twice as much OIL from Foreign countries than we Produce, can only be done by manipulating the US DOLLAR. And by manipulation….I mean GOLD and SILVER.
I am not saying EVERY DROP in the price of GOLD has been done by JPMORGAN et al through the US TREASURY and FED….but many have. There are two excellent articles about this topic. Mark Lundeen, in his most recent article shows just how BIZARRE the COT postions have been in SILVER. Here are some examples of percentages of COMMERCIAL LONGS over a period of 1,012 WEEKS. Yes, this is more than 20 years.
COT LONG POSTIONS IN PERCENTAGES over 1,012 WEEKS:
T BONDS: 51.98%
HOGS :…..49.01%
CORN:……47.18%
COTTON: 43.72%
CRUDE OIL: 42.43%
GOLD: …..36.96%
WHEAT: …35.71%
COPPER: ..29.94%
NAT. GAS: 20.77%
COFFEE: ..19.90%
SILVER:………0%
_____________________
IF you look at those FIGURES, you will notice that COMMERCIALS were NEVER LONG SILVER in 1,012 WEEKS. TOM….what do you think of them APPLES??? Furthermore, Lundeen has some excellent charts on the SILVER and GOLD COTS over the past 2 decades. You can see the charts and his article here:
http://www.gold-eagle.com/editorials_08/lundeen012409.html
Also, ROB KIRBY has done some great research on the GOLD MANIPULATION . His last article shows just how GOLD was CAPPED right when the largest INVESTMENT BANKS went under. You can find his article here:
http://www.financialsense.com/Market/daily/monday.htm
Tom….again…I agree with much of your previous reply….but you also have to realize….the UNITED STATES can not afford to trade REAL GOODS for FOREIGN GOODS. This has gone on by the PROPAGANDA MACHINE of the US GOVT selling SNAKE OIL wrapped up in worthless toilet paper will green numbers printed on it. The only way AMERICANS can enjoy their CAKE and EAT it too…is by constant manipulation and propaganda in making foreign countries believe the US DOLLAR is GOOD as GOLD.
You have to admit….COMMERICAL SILVER COTS being NET SHORT for over 1.012 WEEKS smells FISHY even if you have CUT OFF YOUR NOSE to SPITE YOUR FACE.
Sure there is propaganda and manipulation but having the largest GDP, the most effective military offense including both conventional and nuclear, the stablest political system (as evidenced by continuity), a near-global hegemony as a result of having won a world war on two fronts, and a relatively free economy also go a long way. If I had to estimate the role of propaganda and manipulation in the U.S. dollar “bamboozle”, I’d say it is quite minor in comparison.
Manipulation takes place in all markets. It has even been sanctioned by the SEC. It is called “market making”. Nobody accuses a market maker of “capping prices” by making liquidity available in a security that is temporarily in high demand. Why should a bullion bank that provides liquidity to the gold and silver markets be considered any different? Of course it is impossible to “make markets” in most commodities because their stock to flow ratio is low in comparison to gold and silver. We can thus give Kirby and others the benefit of the doubt that the bullion banks are in fact responsible for “capping” just about every price rise (even if that is patently false). The response would still be “so what?”.
We can look at central bank gold sales in a similar detached manner. It is irrelevant if they intended to flood the market with supply in order to keep the price from breaking out or merely to generate income from a non-earning asset as they claim. Either way it is their prerogative. And either way it means that gold prices are going much higher in the future.
By the way, I think Lundeen’s argument that the Federal Reserve and U.S. Treasury have been orchestrating gold sales and gold leases is total bull. Pure speculation. For one, the Treasury used only the ESF as a policy tool (before the current crisis) and there is no reasonable basis, much less evidence, to prove that the ESF has intervened in the gold market. Moreover, whatever gold the Fed holds it does so in custodial capacity and therefore it is not in a position to dictate gold sales.
There is also mention in Lundeen’s article that the last independent audit of Fort Knox was in the 1950s during Eisenhower. That is totally wrong. They only did an internal count in the 1950s and it wasn’t until the 1970s that the Treasury auditors began a regular program of internal audit. That audit was subsequently augmented with an overall external audit by independent accounting firms starting in the 1990s but these auditors did not actually observe the annual physical inventory. It was not until 2006 that the Treasury hired a “Big 4″ accounting firm (KPMG), which for the first time insisted on observing the annual physical inventory of Treasury gold reserves before it can issue a “clean” audit opinion. GATA complains that KPMG’s audit report does not describe the procedures actually followed in auditing the gold reserves but that is a ridiculous position given that audit reports NEVER describe procedures unless they are a departure from generally accepted auditing standards (GAAS). GAAS, by the way, requires physical inventory to be taken by company personnel (not the auditor as that would constitute direct involvement in internal control). This physical inventory is observed by the independent auditor with the results sampled on a test basis in order to form a reasonable basis to conclude that the amounts reflected in the financial statements are free from misstatement.
As I’ve mentioned numerous times before, the vast majority of illegal manipulations create artificially inflated prices. It is even theoretically possible to perpetuate a manipulation for many years as Madoff has recently demonstrated. There are also numerous historical examples including the Hunt Brothers as well as the Sumitomo copper scandal. But there is no historical example of a long-lasting manipulation to suppress prices. ZERO. The reason is that it is very easy to confound such a manipulation as soon as somebody with a reasonable amount of capital becomes aware of it.
Some claim the gold market is uniquely subject to manipulation because central banks historically have held most of the investment-grade gold (bullion) in the form of reserves. If so, the same argument falls flat when it comes to silver. In any case, the gold market was under a $20 billion market for most of the 1980s and 1990s in terms of mine production. Only a fraction of that $20 billion would have been required to move the gold price much, much higher. How do we know this? Because that is all it took during the current bull market in gold. Ignoring gold sales by central banks on the basis of prerogative and instead focusing on “naked” sales only (short sales where the seller does not actually have gold and must borrow or otherwise pretend to own it), there would have been ample opportunity to make an absolute killing by positioning in such a manner as to exhaust the short sellers and force gold to its true equilibrium price.
I can hear the protest now: all the central banks and bullion banks are colluding to suppress the price of gold, that is why nobody has taken the opportunity to bust it. Are we to believe that every member of such an allegedly dishonest group would somehow adhere to a scheme that ignores short-term gains in favor of mutual best interest in the long term? Yeah, right. The Mafia acted that way too. Not.
When we look at silver the situation is different. There hasn’t been major central bank selling and so the culprit of manipulation purveyors has always been the phantom “naked” short seller. Lundeen’s COT observation is a case in point. It sure looks bad. But it is missing one very important thing. Silver is the only “commodity” he lists that has both a huge stock to flow and almost complete opacity. Bonds and gold both have huge stocks to flow but the market generally understands the total amount of bonds and gold that is out there.
Not so with silver. In fact, it is now generally admitted by even the biggest silver conspiracy theorists, including Ted Butler, that around 20 billion ounces of silver exist in various forms throughout the world. At the high extreme, perhaps 1 to 2 billion ounces of this silver is observable in the sense that it is potentially available to the investment market. But nobody (okay, maybe somebody — but they aren’t talking) knows for sure how much silver exists in “hidden stockpiles”. It is at least many millions of ounces and could conceivably add up to perhaps several billion ounces. Indeed, the missing hole to fill when it comes to a detailed analysis of historical production and use of silver is in the range of 10 billion ounces or more. This much silver cannot be accounted for, even after considering all losses such as wear, dissipation through silver plating, shipwrecks, industrial consumption, etc.
Given these uncertainties about the size of possible stockpiles, I find it reasonable to speculate that the commercial COT situation is the result of opportunistic shorting by parties who plan to own silver indefinitely as opposed to selling it if and when the price is right. It would not be unreasonable for such parties to always remain net short the COMEX against large physical long positions. After all, they don’t care about the price itself at any one point in time. They have no plans to sell regardless of the price and so price is irrelevant to them. At the same time, it would be expected that the size of their short position would build as prices rose. They don’t have an aversion to making money, they have an aversion to selling silver.
I almost forgot, let me add this: at any one time there is tens of millions of ounces of silver in various stages of raw material or finished form in production, transit or inventory. Some of this silver represents a large component of total unit value such that a drop in the silver price will force the sale price below the marginal cost of production. The most obvious example of this is silver bullion which most large dealers will always hedge.
In such instances, silver would be hedged in proportion to the sensitivity of profit margin to lower silver prices. In general, the higher the price of silver the more sensitive a product is to a loss upon sale due to negative profit margin. Therefore, more silver-in-process would be hedged against a price decline as prices rise. This goes a long way to explaining why COTs become increasingly short on the commercial side as silver prices rise. To some extent this applies to gold as well but since gold is predominantly used in jewelry with a very high profit margin there isn’t as much effect on COT structure. Instead, gold miners and refiners are likely to be a more important source of the fluctuating commercial short COTs in gold.
TOM…a simple agree or disagree would have suffice. What am I supposed to make of all that well reasoned prose. So….I gather BERNIE MADOFF is the only one that can pull off a several DECADE PONZI SCHEME
You took the time to answer many of my comments and seemingly tear my thesis apart. What’s the fun in all that?
As for the HUNTS manipulating SILVER…I rather think of them hedging their huge Oil profits from inlfation by buying up the only LEGAL MONETARY METAL at the time. Gold was still illegal to be owned by Americans. Manipulation might be rightly directed at the SHORTS on the COMEX at the time.
Lastly….you do bring up good reason points. And yes, I realize many of the positives that the United States has to offer. Even though the United States has the largest GDP in the world based on CONSUMPTION and SUBURBAN SPRAWL does not make it a MODEL ECONOMY to go by.
TOM…you know the saying going around the TOP CLOWNS, MAGICIANS and NIMWITS on WALL STREET/GOVT today, that it’s TO BIG TO FAIL. Unfortunately, as for the United States, that saying might not only be for BANKS and BROKERAGES.
Hi Tom:are you saying that the bullion banks are not capping the price of gold periodically? And that the evidence is that no one broke ranks to profit individually? I’ll offer my 2 bits as to why I disagree. first off they are buying and they are doing it discreetly in various spot markets rather than the comex. Why cause the price to soar too quickly which is what would happen if you bought too much on the comex. If I were a big buyer I would want to buy quietly and the comex manipulation would allow me to accumulate slowly but at low prices, or wait for a big seller and buy off market. Secondly and probably more importantly no one in a position to move the market wants to rock the boat of the current system that allowed them to get so wealthy in the first place. It would invite retribution from the powers that be. I am sure those who have intended to take physical gold off the comex have received subtle warnings about consequences to their wealth including but not limited to “BTW we could take your gold and other assets from you under the patriot act or trading with the enemy act right now.” Try fighting that even if you are George Soros or Bill Rogers. Sound like mafia tactics? you bet. You thinnk our govt. is not just like the mafia?
Anybody with money and a brain who wants to accumulate gold better do it as discreetly and quietly as possible and enjoy the fact that the manipulators let them buy it cheap. Finally there is plenty of evidence that the govt will manipulate gold per Alan G, Paul V, WMcChesM, ABX, JPM and the current Treas Sec and cohorts who are part of that cabal for sure. That’s my 2 bits worth and I am clearly in the gold manipulation camp, Silver is a different story and I pretty much agree with you on that. but since silver follows gold no need for direct manipulation there.
Silverax,
your arguments are remarkably bad.
What wars has the US won after WW2? The last ones in Afghanistan and Iraq can not be considered victories, or might be war won but peace lost. Anyway, the goal was not reached. This does not bode well for the future. Somebody will have to pay the war expenses; usually a lost war gets paid with inflation.
Market making should be temporarily and is not the same as manipulation in the sense of trend change. Prof. Fekete wrote some time ago an article about Barrick’s forward selling of future mining output pointing out that this hedge is forcing gold prices down and might bankrupt Barrick in the long run.
In late October 2008 gold traded at a low around 700$ but no metal was available (possibly except 400 oz bars.) Low prices and shortage do not go together in normal supply/demand situations. A shortage in minting capacity is not the explanation either since the US mint was able to produce 2 million oz in 2000 and only some 700,000 in 2008.
Lundeen’s argument of CB’s leasing gold can be supported by a statement from Greenspan from 1998 that the central bank(s) are ready lo lease gold in increasing quantities if the price of gold increases. Starting around 2000 the balance sheet of the German Bundesbank shows instead of gold “gold and gold receivables” without assigning an amount to either position. This is at least a highly unusual accounting practice that in normal business life would be unacceptable.
There might be stockpiles of silver around, but if the owner is insensitive to the price and does not want to sell the metal, why sell it short on paper? ? There is the risk that the buyer of the contract wants delivery. Moreover, the owner of the stockpile and the short seller are not necessary the same body.
That leaves the bullion dealer (or fabricator) as legitimate short seller. By selling the equivalent of his inventory short he takes a market-neutral position. But this assumes the dealer has no concept of market trends. Why sell short as long as an uptrend lasts? This is throwing money away. Only in a downtrend short selling makes sense. A dealer who can call trend changes correctly should be way more profitable then shorting gains in an uptrend away.
Steve, I am actually in agreement with you on so many points — our differences are often only a matter of degrees. For the record, the biggest Ponzi scheme of all time is technically the U.S. dollar, followed by the various other fiat currencies. My problem is with claiming that the motive of the fiat Ponzi scheme was to defraud the general public OR to concentrate wealth in the hands of the “Illuminati” OR to enrich banking families, etc. No, the Ponzi scheme had valid and reasonable goals — stimulate economic activity, regulate the swings in the business cycle, eliminate banking fraud, etc. In some instances it even worked while in others it failed spectacularly. Yet fiat money isn’t unique in having failed. Every gold standard that has ever been tried has also failed. So yes, fiat is a Ponzi scheme while gold is not, but it’s not remotely the same thing as what Madoff did.
The Hunts probably did start out intending to hedge their oil profits. But . . . gold was made legal in 1975. That was a full 5 years before the Hunts lost control of their “silver hedge”. Why didn’t the Hunts use gold? Because it is impossible to corner. The other problem with the hedge argument (which is what got the Hunts convicted) is that the Hunts were using COMEX futures for leverage. In other words, they did not have the money — whether it came from oil profits or otherwise — to actually take delivery. Instead, they were presumably planning to use a portion of the gains from the futures positions to fund their purchase of physical silver. You see how that’s fatal to their claim of innocence, don’t you?
The U.S. might not be a model economy but what many people don’t realize is that the U.S. GDP is among the most insulated against economic contraction. Wasteful consumption is arguably the first to be cut and most of that is actually imported to the U.S. Examples include driving SUVs (imported oil), car purchases in general (buying a new car can often be deferred for several years) and consumer shtick (imported from China, Japan, Taiwan, South Korea, etc.). Ironically, many of the countries with supposed model economies are actually more dependent on U.S. consumption — particularly wasteful U.S. consumption — than even the U.S.! Then there is The Truth about China’s Growth.
Tom, wouldn’t the “gold certificate” or “silver certificate” have to be fully convertible to actual gold or silver in order to be credible? I mean the old fashioned “gold window” where you can go and free of charge turn your paper for coins — if you have any doubts that it is the real thing that your paper represents…
British still use their “pounds” that weight nothing — How different would this “American ounce” be from the “British pound” without full on-demand convertibility?
I certainly would see no reason why would people turn their real gold to the government for a piece of paper any more then they are inclined to do so now…
Or am I missing something in your scheme?
Yes, an open gold or silver “window” along with “free minting” (you bring bullion to the mint, they issue you equivalent amount of legal tender coin) would be ideal. But that would not be the first step that the governments would take (or rather, be forced to take because they’ve run out of every other option). And it would not work for international trade. Finally, it would not work as a way to wean off the dollar (Gresham’s law would force the gold and silver coins out of circulation). The difference is that the gold certificates would have to be backed 100% by gold that is verifiable in such a way that the vast majority of people would trust that the gold is actually there.
Rob, Many of your points are valid in principle but even if I were to agree with them 100% it would be very difficult to claim it as an illegal conspiracy intended to defraud the market. As you say, the manipulation — assuming it is meant to keep the price low — benefits EVERY buyer, not just the bullion banks. What it doesn’t benefit is the SELLER, and here I am thinking gold mining companies. Yet given their almost universal disinterest in pursuing restitution for any alleged damage caused to gold mining, as well as the impassible path that shareholder activists would have to reform such attitudes, one would think that organizations like GATA etc. should be reasonable about dropping their crusade, no?
Silverax, I partly agree: Sentiment, psycholigical tenor and undercurrents are important factors for the economy. However, this is a different time and this is a different crisis. The informed people are better informed than ever by virtue of the internet. I guess that these people are in the ultimate control the sentiment which then finds its way into the (standard) media.
You should read the European comments on Davos: “Lemmings”, etc. The comments on the short-sighted European stimuli programs are similar and certainly do not please the polititians.
I don’t want to support the doom-related discussions here, but the main question of the informed people is: Can Obama/the US master this crisis?
The current sentiment - from my point of view - seems to be: If this is possible, it will be a very close call, demand severe sacrifices, and the cure probably will work only once. The USA thereafter will be not the USA as we know it today. The tendency is: The necessary sacrificies will be so enormous that the polititians / Obama will make the mistake to avoid these and thus probably will fail.
Gold seems to follow this assessment for the moment.
Last comment on the “peak oil” topic often mentioned here: During my research in the Canadian Arctic I had the chance to see maps of claims held by Big Oil/Gas in this region. [By the way, the payments for these claims help to finance the Eskimo state Nunavut.] There is still a lot of oil out there, but it may be expensive and complicated to obtain. There are other regions in the world with known oil/gas-fields with or without claims on them (e.g. in the Antarctic region for political reasons). I am not so sure that we really have seen “peak oil” - or that “peak oil” is not a sustainable output level for quite a while, which may be long enough to switch the enconomy to a different energy carrier.
DiscreetSilverBug
These are indeed different times.
Agreed, investors are more informed thanks to the internet. But this hardly changes anything. What floats around as information is mostly garbage opinion. To complicate matters, economic theory itself is a matter of garbage opinion. To paraphrase an example, nobody knows how much silver is lying out there. but look around and see that everybody has some smart opinion about it. Everybody has an “informed” opinion on naked short selling based on Ted Butler’s non-stop chit chat.
You also seem to do a dis-service to the authorities. This is a common mistake. It is so easy to make assumptions like - Fed is wrong. the Fed is stupid. the Fed is a leech. the Fed will lose. Bernanke is a fool. etc. etc.
I mean is this the kind of “information” people should look for? Now don’t mistake me, I am no proponent of Central Banking - but given the backdrop of the situation we are in, including the situation that we have a Central Bank, especially a Central Bank with a problem we can make a rather safe assumption that the Fed is doing its best. God knows, it might be using the internet to assuage these opinions including yours & mine.
Since I have gone this far let me add my 2 cents on what the Fed/Bernanke would do, given the fact that we are in the midst of the chickpea soup that we are in. They are going to PRINT PRINT PRINT. And holy thunder, therein lies the solution too. If that is the Keynesian solution, I don’t care. That is the correct solution. I give too hoots to the Austrian notion to have the markets do their thing at this stage. The problem is damn big now for a “corrective market action”.
And while the Fed is devaluing the dollar it wants everybody in the deflationary, disintegrating camp. “The end of the world is in sight”. This would lead to an orderly devaluation over a long period of time. And believe me this a close call. But we are going to be there.
I should have said “you do the authorities a dis-service by not including them as the beneficiaries of the internet revolution.” Don’t get me wrong.
The Peak Oil story is not necessarily an end to oil. Peak oil is an end to cheap/easily obtainable oil. What we are seeing now is the price of oil being below the cost of production. If this continues, we will see oil that is uneconomical to produce, no longer being produced which could well create a supply crunch later on.
Enormous sacrifices? Yes, in terms of the integrity of fiat money. In other words, the sacrifice will be made by savers. As for enormous, the entire mortgage industry and a large portion of the insurance and banking industries have already been effectively nationalized in the US. We are one liquidity trap away from Obama declaring emergency powers (I’m not talking about bank holidays) and I believe this could happen in as little as 2 months. The slope of economic deceleration is so steep that any “fix” to have a chance will necessarily involve a coordinated multi-trillion dollar effort. If you talk to people in just about every business, there is extreme pessimism with the term “nuclear winter” getting lots of mileage.
NO!
Freedom to own gold that is freely traded is the only means of individual freedom we have! GATA is our lone activist in fighting for that. AND Who do you think are the biggest contributors to GATA -could it be mining companies?? I think so. Govt pressure against miners is probably greater than towards individuals.
There is too much evidence both empirical and stated that govts. manipulate gold via proxies JPM ABX GS etc. and paper shorting is the method du jour because as you stated manipulating with phgysical is no longer effective as there just isn’t enough no shortage of paper and no bottom to the pockets funding the manipulation while all losses are socialized and all actions made “legal” by executive order or strongarm.
It is not necessarily the same factions buying both gold and the dollar. My data and sources are indicating a somewhat limited group buying gold while dollar buying has a wider basis. If true, we could soon see the gold/dollar relationship return to “normal”.
I would just add that everybody will hold out until the last moment possible. There are only two possible choices: Inflate or Die. If the Inflate involves some form of gold in a monetary role, there might even be a chance of salvaging things before having to start over.
I think the supply crunch is inevitable, only a matter of sooner or later. Sooner if reflation works and sooner of cycle of growing instability in Middle East accelerates.
Sorry but freedom has always come at the barrel of a gun, blade of a sword, end of a spear. Of course it helps to have gold so you can buy guns but not always. In any case, gold throughout history has been used to enslave many more people than it has freed.
I’m probably just paranoid, but I would never trust GATA to speak for my “gold rights”. GATA does not have the support of the vast majority of mining companies not because GATA cannot do positive things for the gold price but because GATA’s approach is futile and in many ways counterproductive.
What wars has the US won after WW2?
First, we need to separate military vs. political. The “only” hegemony the U.S. has achieved since WWII involved South Korea (the U.S. effectively won the Korean War based on what we see in North and South Korea today), Eastern Europe (the U.S. won the Cold War), Panama, Operation Desert Shield, Iraq and Afghanistan, plus a few I’m forgetting.
Of course militarily the U.S. has won every war it has fought including Vietnam and the current Iraq and Afghanistan entanglements on the basis of achieving stated military goals.
Anyway, the goal was not reached.
Yes it was.
Goal in Vietnam — stop the spread of Communism aka domino theory. Success.
Goal in Afghanistan - disrupt organized terrorist network from carrying out 9/11 scale attacks. Success (so far).
Goal in Iraq - prevent weapons of mass destruction from being used in a terrorist attack on U.S. soil. Success (so far).
So, what goals weren’t achieved?
Somebody will have to pay the war expenses; usually a lost war gets paid with inflation.
ALL wars get “paid” with inflation.
Market making should be temporarily and is not the same as manipulation in the sense of trend change.
“Should” is your own totally arbitrary qualifier. Market making is an activity that provides liquidity to the market, period. Since the trend in gold has been up for the past 6 years but it was sideways to down before then, can we conclude that manipulation is actually responsible for the “trend change” being up? In other words, maybe the central banks have been trying to manipulate the price of gold higher. Certainly the ECB gold agreement first put in place in 1999 seems to coincide rather well with the current bull market in gold.
Prof. Fekete wrote some time ago an article about Barrick’s forward selling of future mining output pointing out that this hedge is forcing gold prices down and might bankrupt Barrick in the long run.
I would have agreed (and did in fact agree) up to about a year ago but it is now clear the Professor was obviously wrong about the long run. I’m willing to make such a conclusion at this point even if we go instantaneously on the gold standard because Barrick has amassed a very large near-production gold resource that swamps the remaining hedge position even though it might represents more than 1 year of production. While it is very likely that Barrick’s forward selling was a business decision facilitated by the desire of central banks to “lease” gold, there was never any secret about this relationship. I’ll grant even that Barrick may have hedged in part to purposefully put other gold miners out of business. That, however, still does not constitute a trust or make its actions illegal. Note that gold miners who hedged were actually more likely to go out of business because their hedges, unlike Barrick’s, were FIXED MATURITY. Meanwhile, Barrick was able to roll its hedges forward indefinitely as well as to contractually allocate them to specific projects.
In late October 2008 gold traded at a low around 700$ but no metal was available (possibly except 400 oz bars.) Low prices and shortage do not go together in normal supply/demand situations.
The vast majority of the gold market by QUANTITY consists of 400 oz. bars. Your parenthetical admission of “possibly except 400 oz. bars” is quite relevant in that there was in fact no shortage in gold. In fact, the price tells us that there was more than adequate supply of gold. And I’m not talking about paper. Your point is only that there was a shortage in some gold coins. BIG difference.
A shortage in minting capacity is not the explanation either since the US mint was able to produce 2 million oz in 2000 and only some 700,000 in 2008.
So what? Annual mine and recycling supply is in the 80 million ounce range. Total world stockpiles are in the 5 billion ounce range. That makes U.S. mint production, whether it is 2 million or 700,000 ounces, completely irrelevant as far as the gold market.
Lundeen’s argument of CB’s leasing gold can be supported by a statement from Greenspan from 1998 that the central bank(s) are ready lo lease gold in increasing quantities if the price of gold increases.
He and you have taken Greenspan’s comment TOTALLY out of context, as all good conspiracy theorists and others who like to contort basic logic and common sense for personal gain have done. Greenspan was addressing the role of derivatives regulation and specifically the idea that derivatives can be used to extort market players by squeezing the physical markets. In respect of this, what Greenspan said was that worries about a short squeeze in gold, a finite market, are misplaced because central banks would be willing to lease gold to the market so as to make a short squeeze impossible. While central banks actually being able to do that (especially today) is debatable, the fact is that Greenspan was arguing for central bank action in gold being used to support a FREE MARKET (free of manipulators trying to create a short squeeze). This is exactly the opposite of how this quote has been used, that central banks stand ready to co-opt the free market by leasing gold in an uneconomic manner.
Starting around 2000 the balance sheet of the German Bundesbank shows instead of gold “gold and gold receivables” without assigning an amount to either position. This is at least a highly unusual accounting practice that in normal business life would be unacceptable.
“Normal business life” is full of millions of examples where things are described in specific ways meant to limit disclosure. For example, Central Fund of Canada, a private company in “normal business life”, currently trading at several % premium to spot prices which presumably means that investors find it a very attractive way to hold gold and silver, discloses as physical gold and silver holdings even the bullion that is a receivable from refineries. Is this unacceptable? Clearly not to CEF holders, many of whom I’m sure would nonetheless have a problem with the Bundesbank practice. In any case, the Bundesbank actually made an improvement in its disclosure (which is also arguably better than the current disclosure of the CEF) by moving from a title of “gold” to “gold and gold receivables”. Yes, a further improvement would be to actually break out the two numbers but the improvement itself cannot be used as “proof” that a conspiracy exists.
There might be stockpiles of silver around, but if the owner is insensitive to the price and does not want to sell the metal, why sell it short on paper?
You are kidding right? The owner is insensitive to price but like most people in this world, he/she/it/they are sensitive to profits.
There is the risk that the buyer of the contract wants delivery.
At least on a historical basis, this is a tiny, tiny risk. Other than the Hunt Brothers’ threat of wanting delivery in 1980, there has never been anything for shorts in COMEX silver to worry about. Even Warren B. was able to acquire over 100 million ounces of silver mostly over the COMEX and I doubt any of that came from these “secret stockpiles”. If a lot of deliveries were constantly taking place, that would be different, but at it stands only a small percentage of contracts are ever delivered each month. This is NOT the “fault” of the shorts, but the “fault” of the longs; there is simply not that much physical demand for COMEX silver. Besides, no specific contracts can be forced into delivery and the short position, in the worst case, can be offloaded for cash, even if it is at a really high price. At least that has been the case in 100% of the months (with the possible exception of January 1980) so far since the 1960’s when COMEX silver started to trade, and that is quite a good track record.
Moreover, the owner of the stockpile and the short seller are not necessary the same body.
Clearly, Sherlock! The owner of the stockpile uses a bullion bank as an intermediary, which makes it look like the bullion bank is “naked” short (since it does not itself hold a large stockpile of silver) to those who have no concept of how the bullion markets work.
That leaves the bullion dealer (or fabricator) as legitimate short seller. By selling the equivalent of his inventory short he takes a market-neutral position. But this assumes the dealer has no concept of market trends. Why sell short as long as an uptrend lasts? This is throwing money away. Only in a downtrend short selling makes sense.
You must clearly be a communist or socialist because you don’t appear to grasp even the most rudimentary aspect of capitalism. A dealer makes money by intermediating the spread between the buy and sell. In the case of gold and silver, the dealer is typically long paper and short the COMEX. That is the main intermediary play. In commodities like oil or grains, the intermediate trade is different. But in all cases the dealer makes money on the spread between the two markets (physical and futures). Of course the other side of the paper is held by the owner of the physical stockpile. In effect, the dealer makes a deal to hedge the physical position using the COMEX. That is why the dealer is called a “dealer”.
A dealer who can call trend changes correctly should be way more profitable then shorting gains in an uptrend away.
This is not a dealer, it is a trader. Many bullion banks have both dealer desks and trading desks. The two are separate although there are “leaks” between the two, primarily of information that gives the trader an upper hand in the market. Even without this leak, however, it is obvious why “sell short as long as an uptrend lasts” — BECAUSE it won’t last forever. Typically the short selling will increase during price spikes of a magnitude that have not been historically sustainable. A subset of longs ALWAYS hopes “this time might be different” while the shorts simply play the averages. These longs then make up crazy stories about why they are wrong EVERY SINGLE TIME. I prefer the credo “blame yourself before blaming others” but that’s just me.
In conclusion, your arguments are remarkably bad.
Jim, not bad! But why not let the dollar and gold certificate float against each other? That would allow the dollar to be devalued by the market over time (although with a huge initial devaluation), and the Treasury could pay off some of the unfunded liabilities with cheaper and cheaper dollars. The dollar would presumably fade into oblivion over the course of a few years (months?). This would look a lot like hyperinflation but the end would already be preordained — in effect it would come when nobody was willing to extend new credit in dollars.
The upper end of the U.S. government’s unfunded liability including social security is more like $50 trillion, not $16 trillion. The other consideration is that the gold certificate system would require a major contraction in government and therefore some portion of unfunded liabilities could potentially be paid with future taxes. Either way, who knows where gold might go on a nominal basis (at some point when all dollar-denominated debts are assured of being paid off, the dollar would likely be fixed against the gold certificate) but in terms of purchasing power it could certainly rise by many multiples.
The biggest winners in this outcome would be debtors who are able to maintain dollar denomination until the very end (this could be harder to do then it might seem — I’ll talk about this more in the future — but it should suffice to say for now that the government would be in the best position to “benefit” from this) and the biggest losers would be dollar-denominated savers. Members of this latter group are the ones who are probably going to be making the “sacrifice”. The social justification could even be that, since savers are “wealthy”, they can literally afford to pay for the public’s collectives sins. Constituting a minority also makes this crowd easily swept away by the political winds. Yet these “victims” will be far from helpless — all they need is something like 5-10% allocation to gold.
If outfits like GATA were truly selfless and concerned about practical matters, they would make it their mission to “save savers” by trying to get as many people into “5-10% gold” as possible instead of continuing their tired Don Quixote act.
Tom-
Thanks for the reply.
> But why not let the dollar and gold certificate float against
> each other?
Because the entire structure of our society: contracts, laws, paychecks, everything is denominated in dollars. So we get to keep our institutions. Old federal reserve notes and electronic balances in banks and everything get to just carry over and are still nominally the same after the event as before, except the unit of account is $1 gold cert instead of $1 FR note. By contrast, introducing a distinct currency that trades side-by-side with the dollar adds complexity and creates a lot of work.
> upper end of the U.S. government’s unfunded liability
> including social security is more like $50 trillion, not $16
> trillion.
I was thinking $50T was total obligations, including the treasuries we’ve issued. I was thinking treasury debt would still exist (and holders of that debt would pay a big part of the price).
> The biggest winners in this outcome would be debtors [...]
> and the biggest losers would be dollar-denominated savers.
Right. Consider two things:
1) There are few savers who just hold dollars. Most own stocks and other investment vehicles, which would quickly adjust to their new real value from their initial nominal value.
2) The US is a net debtor, so in the aggregate the US benefits at the expense of its creditors. Even though nominally the US creditors will be whole, the dollars they are paid back with are devalued.
I don’t think floating would be that big a deal as the “structure of our society” would remain denominated in dollars initially. Many countries without sophisticated systems like we have in the U.S. have experience with dual currencies and it doesn’t involve a huge amount of complexity or a lot of work. Over time, new “contracts, laws, paychecks, everything” would be denominated in gold certificates gradually replacing the dollar-denominated versions.
The only way this would really work is if the dollar and gold certificates float. Otherwise good ol’ Gresham’s law would take over and the gold certificates would disappear, only being used for mandated payments (taxes, etc.). Note also that if gold and dollars were fixed against each other, it is very unlikely that any gold would be tendered to the Mint.
You are right that it would not be necessary to monetize $50 trillion. On the other hand, there are hundreds of trillions in derivatives and in a financial meltdown some of these “notionals” will become “actuals”. Even if just 10%, which is not unreasonable given a 100-year crisis, we are talking about tens of trillions with a large portion of that held by U.S. financial firms. In any case, some debt could continue to be carried especially if justified by taxing powers.
The treachery of a monetary deflation is such that many people put ALL of their savings into liquid cash. It is like the tsunami metaphor that I and others have used in the past. The sea recedes and many people will stay on the beach or even wander out to marvel at the exposed sea floor even though a huge wave is imminent.
Bottom line, the U.S. has no hope of ever paying off its mounting obligations without a significant monetary inflation. It is silly to think there will be an outright default when it can instead be camouflaged in paper — lots of paper, courtesy of the printing press.
Ok that’s door number one and let’s hope our leaders choose that one.
What if they choose door number two with gold and silver bullion illegal, food stamp program becomes food and energy ration cards and everything else pretty much costs a lot more while world trade and economic activity shrinks, except for government?
which is more likely?
more government control of everything or more freedom via some return to sound money?
or there’s door number three?-and we don’t want to go there!
If they choose confiscation again, it will not do a thing to restore trust in anything-government. What is the difference if they have another 1000 or 2000 tons of gold? It will be locked in jail like the rest of it — this “jailed gold” in big bars does not move commerce very much. The zombie banks with stolen gold are supposed to be more credible?
The rationing of everything? How long do those kinds of systems survive? 5 years? And then what?
So the door number 2 (and probably all others) are just doors to closets — there is nothing there that lasts.
Polar bear I agree with you. I hope pray and dream we get door number one. But that doesn’t mean “they” won’t choose door number 2. After all most of the decisions made so far are more consistent with that direction as opposed to sound money and free enterprise. From what I’m seeing happen the govt. wants to micro manage vitually all aspects of the economy.
Trust in government is rapidly fading world wide. I’m hearing more and more grumbling about govt interference in the U.S. economy from middle class people who used to think the govt was usually doing the right thing.
But they will never voluntarily give up any power esp. spending and taxation
So when we face the inevitable dollar collapse will “they” choose door number one (sound money and free enterprise) or door number two (dictatorship)?