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Wednesday, January 22, 2014

The Golden Rule

 

"He who has the gold makes the rules"

Please note: the "Golden Rule" refers to actual physical gold in one's possession and not futures contracts, GLD shares or even the gold that you have "invested" in via products marketed to wealthy bank clients that claim to have the gold sitting bank vaults (please see this: ABN Amro halts gold delivery and this: Rabobank halts gold delivery).

Based on several inquiries in response to the article I co-authored with Dr. Paul Craig Roberts - LINK - I wanted to clarify a couple points.


It is of critical importance to distinguish between paper gold and physical gold. The majority of gold commentary generically references the trading of gold, without differentiating between "paper gold" - Comex gold futures and other paper-derived products like GLD or bank investment accounts marketed to wealthy clients - and actual physical bars. The difference is crucial because paper gold contracts can be printed in unlimited quantities and dumped on the market. But the seller of real gold takes the risk that his buyer on the other side might demand delivery of the physical gold. If the seller of a futures contract or a bank investment product like the ones marketed by JP Morgan et al is selling security interest in gold that is not really in the vault, the buyer of that product does not own gold. He does not get to make any rules.
The issue is that historically big buyers of physical gold would leave their gold in bank and Central Bank vaults rather than paying the cost of taking delivery in their own possession for safekeeping (cost of transporation + insurance). But China as well as other big buyers now require all purchases to be delivered to their own safekeeping because they no longer trust the western banks and Central Banks. The Fed and its banks have been leasing and borrowing gold from all the vaults in the west in order to have enough gold to deliver to the Asian/Indian buyers. This has kept the price down in order to support the U.S dollar and the euro. The ratio of paper gold products to actual physical gold is at least 90-100:1. At least.
But this gold Ponzi scheme is coming to an end and all signs indicate that the Fed, BOE and ECB are out of physical gold other than some gold in the GLD Trust and scrap remnants sitting at the back of bank vaults that has to be melted and recast in order to deliver to Asia. We know for a fact that the scant 5 tonnes of gold shipped from the NY Fed vault to the German Bundesbank had to melted and recast. And now Germany is left holding 5 tonnes of the 1500 tonnes it gave to the U.S. after WWII for safekeeping.
The bottom line is that the Fed does not have Germany's gold and there will eventually be consequences. This is how sacred the German public considers gold: Imagine that Germany came to this country, took over all the Starbucks, shopping malls and reality tv production studios. Next imagine that they shut them all down and forbid any access to them at all. None. Imagine the response of the U.S. public. That is what is starting to foment in Germany over the missing gold issue.
As I mentioned in the article linked above, Venezuela was able repatriate 160 tonnes of gold in four months. Why is it going to take the U.S. 7 years to ship back 300 tonnes to Germany when it would require just two trans-Atlantic cargo shipments via air? The cost of shipping and insurance is miniscule compared to the value of 300 tonnes. It's because the gold is not there. It's gone. No public official is willing to state the obvious and mostly oblivious Americans have no clue it's even an issue.
But it is an issue and the severity of that issue will grow with time. Already German politicians are preparing legislation that will demand the repatriation of ALL of Germany's gold from the U.S. and France. That will be fun to watch our Government if the legislation passes.

 

But the bottom line is that the U.S. gold being held by the Fed - all of it - is gone. And soon the U.S. will not be making any rules in the global geopolitical arena.



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If the following is announced, you will see gold rise to $3,000 bid no offer:

(courtesy Peter Cooper/Arabian money.com)

 

China set to hike official gold reserves to 5,000 tonnes next to combat its growing financial crisis?

 

Posted on 22 January 2014 with 1 comment from readers

The Internet is abuzz with rumours that China may be about to reveal its new official gold reserves with a total of up to 5,000 tonnes way above its previous 2009 tally of 1,054 tonnes. Last week the world’s second largest economy pumped in $42 billion to shore up its faltering credit system.

Raising official gold reserves to become the second largest holder of the monetary metal is another card China can play to underpin its economy as it struggles to grow exports. These are the savings from the good times to help the country through less easy days.

Monetary metal

‘Currency Wars’ author Jim Rickards says: ‘This should be an earthquake. Even the gold deniers, the gold doubters, the Nouriel Roubinis of the world are going to have to sit up and take notice. If gold is a barbarous relic, if gold has no role in the monetary system, if gold is a stupid investment – and that’s not my word, that’s their word; they say the people who invest in gold are idiots and fanatics and a lot of other less acceptable words – well, if that’s all true, why would the Chinese have 5,000 tonnes?

‘The minute you think of gold and paper money side by side, or having some relationship, this is how you get to these price levels of $7,000-9,000 an ounce.

‘They’re not made up. They’re not there to be provocative. They’re actually the math. Those are the numbers you get when you simply divide the money supply by the amount of gold in the market.’

Gold solution

So when will China show its hand? It’s absolutely no secret in the gold industry that huge amounts of physical gold have been heading into China for the past few years. Only last week we heard that the Shanghai Gold Exchange delivered a record 2,197 tonnes in 2013 (click here). This is just the tip of the iceberg.

It’s unbelievable that Goldman Sachs and Morgan Stanley persist in frightening markets with talk of $1,000 an ounce gold knowing this. Then again they could well be buying everything they can buy at current low prices or acting as an agent for the Chinese. Gold is the very stuff of conspiracy theories.

The rumours say that China will make its new reserves public in the first quarter. All gold price forecasts will be transformed if they do and our gold stock picks will surge ahead (click here).

Posted on 22 January 2014

 

 

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Bill Holter has delivered two huge commentaries and they are a must read.

 

The first one is self explanatory. As for the second one, (on whether we are heading for deflation or inflation), I urge you to read it slowly and carefully try to fully understand where we are heading. I believe that Bill is 100%

 

And now his first paper: "Conspiracy fact"

 

 

 

(courtesy Bill Holter/Miles Franklin)

 

 

 

 

Conspiracy fact?

 

Conspiracy fact?

 

 

 

 

 

 

 

I just recently wrote that "2 things will happen". 1. it will be understood that the central banks have far less gold than they had claimed and 2. the true "fractional reserve" nature of the paper gold markets will become common knowledge. I'd like to do a couple of things here, first use a little common sense to show that these will become "conspiracy fact" and then how might the "reaction" be.

"We" conspiracy nuts have long said that physical supply did not and could not meet the current physical demand for nearly 20 years now. We argued that WGC and GFMS demand numbers were always too low and that supply numbers to meet even their too low numbers were fudged with "scrap" used to plug the gap. We argued all along and much more fervently after many central banks turned into buyers that the ONLY place that the supply could have come from were the central banks (particularly the Fed). Using only 3rd grade common sense here, why is it do you suppose that Germany was told 1 year ago that they'd have to wait 8 years to get 20% of their gold back? Was it because as we were "told" that any undertaking "this large" would take many years...or maybe because the gold actually isn't in the vault anymore? I would ask the question, how has China imported several thousand tons over the last couple of years yet we can't move 300 tons unless it's done of 8 years? Does China have "stronger boats" or "more powerful airplanes"? Or is the gold that we are shipping of the "heavier sort"? Yes I know, gold is gold but I never could get the answer correct whenever asked which is heavier, a pound of feathers or a pound of gold?

Then of course we have the "crazy conspiratorial" thought that the gold market is "fractional reserve". I think that all you need to do is look at the COMEX here. Of course we could look at the LBMA and the volume of "gold traded" but we have already heard from Jeff Christian that this "physical market" trades 99 paper ounces to every 1 real ounce. If you look at the COMEX, the registered inventory has almost been exhausted. After fully accounting for December deliveries there are less than 200,000 ounces available to deliver...looking at the Feb. contract there is still an open interest that represents over 15 million ounces. Is that "fractional reserve" enough for you? OK, so you say that all of this 15 million ounces will not stand for delivery and you'd be correct, but what if another 40 tons stand this year like they did last year? 1.3 million ounces cannot be satisfied by a sub 200,000 ounce inventory.

Here is my point, if central banks (namely the NY FED) have sold major portions of their physical hoards (and that of other nations that they were entrusted with the safekeeping of), did that temporarily add to the "supply"? If the futures and ETF markets are trading pieces of paper that do not and did not fully have gold behind them on a one to one basis did they not also create "fake supply" that affected the price by creating the illusion of more gold available than there really was? Yes I know, the COMEX apologists will say "but for every seller there is a buyer so what's the problem?". Using our 3rd grade (but sound) logic, the natural question would be "seller and buyer of what?". Really, what are they trading? And if it is not "really" gold then why should it have any effect on the price of gold? Wouldn't this divert much of the demand (that thought it was "real demand") towards something that in reality has nothing at all to do with the "real supply" of gold?

So in the real world for nearly 20 years (10 for the ETF's) we have had buyers "spending money" on what they thought was real and sellers who knew that the supply was fake and could basically sell as much as they wanted. It's a wonder that gold's price is not still $300 per ounce! (It's not $300 because of the fact that physical buyers even after subtracting those who were fooled has STILL outnumbered the true supply even after central bank "additions" to mine supply).

Now the important part, what does this mean? It means that once the masses figure out that all of this "hokey conspiracy theory" is actually fact, reality will set in like a tornado out of nowhere. What will be the reaction of the 99 "gold investors" who thought they owned gold but find out that they didn't really? And since this "subset" only represents 1% or at most 2% of ALL investors, what will the other 98 or 99% of the total do? I'll tell you what...the 99% will absolutely freak out in panic "oh my God, my gold isn't gold" and the other 98% of the entire investing public will do what they ALWAYS do. They will act as humans (even dogs and horses) by wanting what they can't have! A mad scramble for anything yellow and shiny will ensue!

I know that someone will e-mail me why the following is incorrect, untrue or faulty logic but please save it because if the number is not "exact" it is somewhere in the "out there" range. Using our 3rd grade logic again (I like doing this because I excelled in the 3rd grade in everything except English), if it is true that 99 out of 100 "gold" investors really do not own gold and this "supposed gold" doesn't even exist...then shouldn't the price be 99 times higher (not even factoring in the 98 or 99% who either hate gold, are too afraid of it or cannot even spell it)? Or for rounding simplicity, shouldn't we just add two "zeroes" to the current price and we'd be pretty close? Are you crazy Holter? $125,000 per ounce?

Seriously, I have said all along that a true price cannot be calculated because we don't have the denominator OR the numerator. We don't really know how much gold is actually "left" nor do we know how much future money supply is yet to come. Heck, we didn't even know until 2 years after the fact that the Fed lent out a "secret" $17 trillion to "save the system. Is that a fact? It would have been laughed out of town at the time but actually happened yet no one even batted an eye! I know this will disappoint you because I cannot (wouldn't try) to make any price prediction other than "higher...multiples and multiples higher than we are now" and it will be done in a panic fashion. Regards, Bill H.

 

 

 

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And Bill Holter's very important topic on whether we are heading for deflation or inflation:

 

(courtesy Bill Holter/Miles Franklin)

 

 

 

 

 

 

Here we go again!

 

 

 

 

They are at it again! "They" being the "inflationists and deflationists". The battle seems to be heating up again whether the end game is inflation, deflation, both, which comes first, which one follows the other etc.. The funny thing is that both camps agree on one thing..."it ain't gonna be pretty". They agree as to "how" we got here and "why" a financial disaster is coming...but not the final results.

I have written several times before on this subject but since it is coming up again I figured I'd take another crack at it. Basically both camps are alike with the exception of what will happen to the dollar and gold...which when all is said and done is all that really matters because between these two (and of course foreign fiat currencies) is where "purchasing power" resides. And isn't this what investing is (should be) all about? Who cares if you worked your whole life for just one dollar, euro or ounce of gold...if that one "unit" held enough purchasing power to carry you and your family to life's end?

That said, both infationists and deflationists agree that a financial collapse is coming. The inflationist argue that fiat currencies by necessity will be "printed" (digitally created) with such speed that we hyperinflate and devalue the currencies to virtually zero. The deflationists say that the debt will default faster than the central banks can print new money and thus the money supplies will shrink and hyperdeflation (like the 1930's) will result. True inflationists believe that gold will explode in fiat price (and purchasing power) while the deflationists disagree and believe the "price" of gold will plummet versus the dollar. My opinion is that both of these camps are correct, and both of these camps are incorrect...however, only one can be correct regarding the purchasing power of gold.

Let me explain why I believe both camps to be correct at the same time. Yes debt (and derivatives) will blow up so quickly that the central banks will not be able to supply new money fast enough and yes the central banks will "try" by "printing". ...But, currencies today are debt based meaning they have value that is derived or "foundationed" by debt. If debt is collapsing it then follows that anything that has value based on this debt will also collapse. Gold is a different animal, as JP Morgan once testified to Congress, "gold is money, everything else is credit". Gold has value because it "is", it has inherent value while no other currency on the planet does.

I guess it is best explained as "gold will be the last man (currency) standing". I think the most major flaw by the deflationists (who are history buffs) is that they equate the 1930's directly with today's situation. The difference, and it is a huge and central difference is that "money" was gold back then...today "money" are simply pieces of paper. "Money" (gold) did not "go away" when everything credit collapsed, it was left standing... as was the dollar since it was interchangeable and directly backed by gold. The difference today is that the dollar is no longer "your grandpa's dollar" anymore.

All of the above said, in my opinion the inflationists will be correct as to the central banks efforts and regarding the nominal price of gold. The deflationists will be correct about debt and the failure of central banks efforts but completely wrong in regards to the dollar. If the deflationists would only substitute gold for what they mistakenly believe the dollar "is" they would be as correct or even moreso than the inflation camp.

In my opinion we will and are witnessing both inflation and deflation bouncing back and forth like a bobsled out of control. We certainly have inflation in the things we need and the deflation of asset prices has been fought tooth and nail by QE, Abenomics and other central bank idiocies. The grand "deflation" will be seen when everything is devalued. When I say "everything" I mean EVERYTHING nailed down, not nailed down, paper, credit, currencies or what have you. Gold will be revalued higher because the "edifice" even after it has crumbled needs a bigger foundation than the current gold price can provide. In this respect we will have a "deflation", only not in relation to dollars...in terms of gold.

You see, the deflation that we experienced in the 1930's was against gold, not dollars. Before you start screaming at and correcting me, please remember what dollars actually were. Dollars were merely "claim checks" on gold but then a funny thing happened in 1933, the dollar was devalued by 75% when the "official rate" went from $20 per ounce to $35. This is where the deflationists are wrong, yes goods and services lost value versus the dollar...but they lost even more value versus gold. Why? Because as JP Morgan said "gold is money, everything else is credit" which included (even back then) "dollars" and absolutely specifically means "dollars" (or any other currency) in today's world.

Which brings us to where we are now, I have long contended that a "reset" will occur. I believe that we will see both, massive inflation and deflation at the same time as a result of this reset. The dollar will be devalued by maybe 30-50% which will make the inflationists correct...AND gold will maybe have a "zero" added to its dollar price which will make the deflationists correct (only in real money terms but still incorrect in dollar terms). "Stuff" will cost more in dollars and far less in terms of gold which will "feel" like inflation but in reality be deflation.

Before you bombard me with the true definition of inflation and deflation, yes I get it and have read Webster's dictionary and their definitions. All I am saying is this, I feel confident saying that "there will be more dollars outstanding in the future than there is today". I also feel confident that saying "there will be less gold to support the system in the future than there is today (at today's price)". The "dollar part" I think you will understand and agree with me but what about the "gold part"?

We have 2 major and largely unknown (to the masses) future events coming. A. central banks (with the exception of China) have far less gold than they say they have and B. because of the nature of "fractional reserve gold" there is only1% or at best 2% the quantity of real gold ACTUALLY in the system. Between these 2 events, the actual supply is far far smaller than the system "acts like", when this fact becomes common knowledge we will experience the greatest deflation (versus gold) in all of history. If I am correct about a reset rather than the markets doing it over a period of time, we will experience the greatest transfer of wealth in all of history. We will see the greatest wipeout of "wealth" to the greatest majority ever and at the same time we will witness the greatest accrual of wealth to the smallest minority ever...including the "wealth created" over the last 5 years of QE specifically for the current elite "1%'ers". Regards, Bill H.

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