China Contemplates More Investment…

Posted in Blogroll on September 14, 2011 by Minimux

Good day… And a Tom Terrific Tuesday to you! Well… the death watch for Greek debt continues… I saw one pundit say yesterday that a Greek default wasn’t a question of if, but when… The markets are convinced that Greece and the European Union have no way out of this but to default. The Eurozone leaders are still trying hang on to the 10% chance that Greece won’t default, and good for them… it would do no one any good for them to throw in the towel when there’s still a chance… Unfortunately, the chances are slim and none… and Slim left town!

The Greek drama has really weighed on the currencies this past week, and as I kept telling you last week, the perfect storm was brewing for a period of dollar strength… There’s no need to panic… We’ve seen these periods of dollar strength before folks… Some last longer than others, but not once have they indicated that the weak dollar trend was over… And as long as the U.S. debt continues to grow, and I saw something the other day that showed the U.S. Gov’t had added $500 Million in debt since the debt debacle… Well, as long as that continues, and I don’t see any sign of it not continuing, we don’t have an election until next year… the dollar will remain in the weak dollar trend… Remember… the trend is not a ONE-WAY Street… there can be volatility, and this would qualify for volatility!

A reader asked me to talk about the hits that Norway and Sweden have been taking since their one day of glory last week, when it seemed the world finally discovered that Norway and Sweden aren’t a part of the euro! Well… I think I touched on all this last week, so let me go back and see what I said… Yes, there it is… from the Pfennig, Sept 6, 2011… “The recent data from Sweden isn’t exactly giving me a warm and fuzzy feeling about more rate hikes from the Riksbank… Most recently, Consumer and Industrial Confidence were down sharply… So… unless the euro is going to push higher, the krona will have a difficult time finding terra firma, going forward… Things have turned on a dime here… pretty amazing…

Next door, Norway continues to be the best fiscal / monetary balance sheet country in the world… They’ve recently discovered a new source of oil, so their future looks so bright they have to wear shades… The krone though, continues to get tarred with the same brush as the euro… One of these days that will break, when the markets figure out that the krone isn’t the euro or anything like the euro, but instead what I’ve always called it the euro alternative! But for now… that’s not what goes on… “

I love it when I can go back and find something I said… because… in my humble opinion, I’ve said a lot over the years, that eventually came to fruition… and I love it when I can actually point to the day in the Pfennig, instead of being like most other pundits that claim they “called something long before it happened”… I won’t name names, but I find it all pretty funny most of the time, when I hear someone say, “I told you that was going to happen, for I saw this coming a long time ago”…

OK… back to the currencies and metals… Gold really saw the rug pulled out from under it last week. Recall that I told you that I thought, and all signs pointed to price manipulation… Well that (in my opinion) manipulation was so strong, that it triggered “automatic sells”… you know the computer or box generated trades… Well, one sell has brought on another, and before you know it, Gold is barely hanging on to $1,800… The way I look at this is simply that the price manipulation should be looked at by those looking to buy Gold at cheaper prices, as a good thing… for it does provide cheaper prices!

The Chinese renminbi got back on its rally horse last night, and gained VS the dollar… I didn’t think for one minute that the renminbi was going to get caught up in this dollar strength, but you never know! Speaking of the Chinese, I would think that the current level of Gold is just about right for them to come in and begin buying again…

There are a couple of random currencies that are gaining VS the dollar this morning, preventing an all-out rout by the buck… The South African rand and Russian ruble… now there are some strange bedfellows, and then add in the Japanese yen, which isn’t really gaining per se, but more holding its ground VS the dollar this morning.

In New Zealand… Reserve Bank of New Zealand (RBNZ) Gov. Bollard, was up to his old tricks again yesterday, when he was dissing his own currency… We’ve seen Bollard do this many times over the years, and it just ticks me off to no end to hear him trash his own currency! When Don Brash was the Gov. of the RBNZ, you never heard him trash the currency… that’s because Don Brash understood that a strong currency is a reflection on the country, for a currency IS the stock of that country! He understood that a strong currency helps combat inflation pressures… and attracts foreign investment… here’s what I think is going on in Bollard’s head… The recent data from New Zealand has been strong… and the Monetary Policy Committee will meet in a few days to discuss a rate hike… you may recall that I thought the RBNZ would hike in September, so that would be this upcoming meeting… Well, if the RBNZ decides to wait, they will have some ‘xplainin’ to do, Lucy style, when the Monetary Policy Statement is printed a few days after the meeting, which will contain the minutes of the meeting…

So… Bollard is simply trying to trash the currency ahead of the meeting, for he already knows that rates will have to lifted to bring them back to levels before the emergency cuts were made to help the economy after the earthquakes. And it indicates to me that a rate hike is in the cards…

The selling in the Aussie dollar (A$) continued overnight, with the A$ losing another 1/2-cent… Even the strong data from China over the past two weekends hasn’t been enough to wrap a tourniquet around the A$… The A$ weakness hasn’t been a deterrent to Aussie bond buyers… According to a story on the Bloomie this morning… Australian government bonds are poised for their biggest quarterly rally in more than two years as investors seeking alternatives to the U.S. dollar and euro buy the so-called Aussie.

So… I hear that the Italians are talking to the Chinese about buying some of Italy’s debt… Hmmm… I’m not sure the Chinese are feeling good about their investments in Greece & Portugal right now, so right now might not be a good time to go back and ask them for more investment… But then, why not? The Chinese keep coming to the U.S. debt auctions don’t they?

The Singapore dollar has run into a road block, which is strange considering the Chinese renminbi, and the Japanese yen are holding ground VS the dollar. Normally these currencies from the same region, tend to move in like directions, for they all compete when it comes to exports… The Sing $ has gained 3.3% VS the U.S. dollar this year, and gained nearly 10% VS the dollar in 2010… So, to see it lose ground is a little strange…

I think the Asian countries are trying to break the habit of depending on exports and become domestic driven economies… reminds me of one of my all-time fave Chicago songs… Now being without you, takes a lot of getting used to, Should learn to live without it, but I don’t want to. Being without you is all a big mistake, instead of getting easier, it’s the hardest thing to take, I’m addicted to you babe, You’re A Hard Habit To Break!

I saw a news flash go across one the screens yesterday, and the flash read… Bank of America to cut 30,000 jobs! OUCH! Did they check with the President first though? Because he’s doing what he knows to do to create jobs… I’m not being funny here folks… This is serious stuff… BofA is cutting 30,000 jobs… I was talking to Jen, and said, we have about 2200 employees at EverBank now, and I thought that was a lot! But 30,000 that can be let go? Can you imagine how many total they have?

Well… Italy survived another auction this morning… And PM Berlusconi announced that the Italian Parliament will begin to draw up more austerity measures that will pass. Austerity measures are tough, but they have to be implemented sooner or later… the sooner the better, the later may be too late!

The news of a successful auction in Italy has brought the euro up a bit in early morning trading. But the ranges are so tight, Tupperware would be proud!

Then there was this… from Bloomberg… first, though… I want to make certain, that everyone knows that I first brought this thought to the public’s attention last year, and laid out all the steps that China was taking to bring about a change in the dollar’s reserve currency status… OK… here’s the Bloomie…

“China’s renminbi may displace the dollar as the world’s main reserve currency within a decade, according to Arvind Subramanian, a senior fellow at the Peterson Institute of International Economics. “China has almost caught up with the U.S. as an economic power, with an economy about as large in terms of purchasing power and much greater exports and overseas assets. China still has to carry wide – ranging policy reforms, but the internationalization of the renminbi is being pursued in a characteristically Chinese way… micromanaged, interventionalist and enclave-based.”

Chuck again… yes… and I could add tons of more stuff to his thoughts, but it would be better for you to come see me the next time I’m on the road and have this talk on my docket… to get the “rest of the story”!

To recap… The perfect storm that was brewing last week for a period of dollar strength continues to build and has begun to rain on the currencies’ parade. There are a few currencies mustering a rally VS the dollar, the rand, yen, and renminbi… Gold continues to be weak, from last week’s assault on the shiny metal. Greece continues to have a pulse, and a slim chance of avoiding default, and Italy lives through another auction this morning.

Currencies today 9/13/11… American Style: A$ $1.0325, kiwi .8240, C$ $1.0060, euro 1.3675, sterling 1.5820, Swiss $1.1365, … European Style: rand 7.3660, krone 5.6440, SEK 6.6765, forint 207.10, zloty 3.1760, koruna 17.9260, RUB 30.21, yen 77, sing 1.2430, HKD 7.8030, INR 47.57, China 6.3985, pesos 12.82, BRL 1.7020, dollar index 77.27, Oil $88.92, 10-year 1.95, Silver $40.21, and Gold…. $1,815.30

That’s it for today… They are drilling in the office this morning, as we expanded our space, and the furniture gets anchored to the floor… It’s all modular stuff… So, I’ve got that going on trying to drown out my I-Pod! UGH! Cardinals can’t stand prosperity, as they fail to pick up another game on the Braves last night… And Monday Night Football started… I was thinking about how as a young adult I used to think that Monday Night Football (MNF) was the “end-all”… We used to go to drinking establishments to watch the games, or have everyone over to watch it… But somewhere along the way, that didn’t seem so important any longer… But man did we have some fun! (and on the I-Pod, it’s playing the song Kicks!, how funny is that?) Time to get to work… I had to leave before I was ready yesterday, so I have to get caught up… I hope you have a Tom Terrific Tuesday!


The Swiss Franc Abdicates the Crown – Gold and Silver are King!

Posted in Blogroll on September 9, 2011 by Minimux

On Tuesday, Switzerland abdicated the crown as the safe haven currency and pegged itself to the Euro – 1.2 Swiss Francs to the Euro. This left a void. Who would step in as the safe haven currency? Everyone thought it would be gold and silver. Last night as we slept the Central Bank sold of about a billion dollars in gold to force the price of gold down. This caused the dollar to rise and sent money running to the stock market. This is blatant manipulation of the precious metals market because the Central Bank does not want the middle class having any safe harbor. They want them tied to the fiat paper currencies. In the end it won’t work because China will stabilize the PM market but it worked yesterday as the Dow rose 275 and the S&P rose 33.38 points.

Before I begin my essay let me begin with a rousing cheer of “Long Live the King.” The Japanese don’t want it, the U.S. doesn’t want it, and now the Swiss don’t want it either. Gold on the other hand is happy to take the reins.

On Tuesday, Switzerland’s National Bank sent shock waves through the market sending a clear and deliberate message to the world that it doesn’t want to be the de facto safe haven currency.

For months and months, traders have been running to the Swiss franc amid the worldwide turmoil. With the Swiss stepping down as the world’s safe haven currency, gold is now the de facto safe haven currency.

Lest there be any confusion there is now one king – gold. So I say “Long Live the King.”

There has always been a strong correlation between the price of gold and the price of silver. There has also always been a concept that silver, like gold was currency. Indeed, when I was a child growing up silver was currency. I never knew until I went to college that silver had a strong base in industrial usage and industrial use was responsible for a large demand for the supply of silver. Be that as it may, any negative news regarding the industrial use of silver has always been eclipsed by its role as a precious metal.

As gold prices rise, whether in the paper market or the physical market, silver surely benefits. This is because silver offers a greater exposure to the rising demand for a safe haven asset and does so at a cheaper price. Sadly, it has had to wear the thorny crown of being called “poor man’s gold.” I feel while this is a catchy phrase that allows gold to wear the crown of the king it, like most clichés, is untrue. Silver is the perfect currency for bartering. I can’t imagine using a gold double eagle as a medium of barter unless I was trading for a house.

Silver does have a high degree of volatility due to the health of the industrial sector. There a minute traces of silver in almost every electronic device that is made. Computers, IPads, IPods’, are a few examples of devices that use silver and when they are worn out or broken they end up in the landfill. At this time it is too labor intensive to make recycling the silver profitable but the day will come when that is not so.

Investing in silver brings many risks but in spite of these risks many investors still find silver a profitable investment. Indeed many investors say the return on investment (ROI) can far surpass gold exponentially as movements in the price over the last tear has shown. Over the next few years I expect gold to continue to rise in price and continue to reach new highs. I also expect silver to continue to outperform gold on a percentage basis. As gold has enjoyed a parabolic run in the last several months, when I look at the ratio of gold to silver I expect silver to continue to outperform gold and expect silver to be priced at about $80.00 by the middle of next year. Silver is the perfect alternative to gold.

According to the World Silver Survey 2011 world investment in silver rose 40% in 2010 to a new record of 279.3 million ounces. What I found fascinating was that the major demand came from the silver backed ETFs SLV, PSLV, SIVR, SIL, DBS and AGQ.. Physical markets also contributed to the demand.

Strong demand from Asian Markets was a large factor in the growth of import levels reaching record highs. I believe that it is purely human as silver’s allure is especially attractive to the growing middle class of China and India as silver is seen as a cheaper alternative to the safe haven of gold.

In conclusion, demand for silver in China grew by 67% between 2008 and 2010, according to the Hong Kong Mercantile Exchange, which recently began trading silver future contracts due to the amazing growth in the demand for silver. Growth in China and India in the physical markets alone is expected to grow another 30% this year. Physical bar and coin hoarding will continue to gain popularity amongst the Chinese investors as they prefer physical rather than future contracts. Silver demand from India is also expected to do well as the healthy monsoon seasons are increasing the purchasing power of rural Indian farmers who account for 60% 0f India’s total silver demand.

Europe Runs Out of Time, Impossible to Untangle, Breakup Inevitable

Posted in Blogroll on September 9, 2011 by Minimux

One of the many interesting aspects of the Eurozone crisis is how many key political and central bank leaders fail see (or at least admit) that Europe is out of time.

Even more peculiar are statements by ECB president Jean-Claude Trichet who finally does realize time is of the essence, yet Trichet “solution” is a set of measures that must be passed by all 17 nations when those nations cannot agree on EFSF funding, on Eurobonds, on collateral for Greece, or even on whether a fiscal union or transfer union must take place.

In some instances the differences boil down to big country vs. small country concerns. In other instances it is Southern “club-med” states vs. Northern states. Some countries refuse to give up sovereignty, while others welcome giving up sovereignty.

It does not help matters when German chancellor Angela Merkel seems to change her mind on something every other week.

German Court OK’s Bailouts, But “No Blank Check”

On Wednesday the German court ruled that bailouts were legal. However, chief judge Andreas Vosskuhle also stated “This was a very tight decision. It should not be mistakenly interpreted as a constitutional blank check authorizing further rescue measures”, adding that parliament was “forbidden from setting up permanent legal mechanisms resulting in the assumption of liabilities based on the voluntary decisions of other states.”

Finally, the court ruled government must get approval from parliament’s budget committee before granting aid.

Those rulings went pretty much as expected but parliamentary approval of any kind is yet a further restriction and will slow things downs, even if just a bit.

Incredibly Messy Politics

Italy’s prime minister has a voter approval rating of 22% (see Italy austerity plan dents Berlusconi govt support)

Merkel’s Christian Democrat party (CDU), only managed to pull in 24% of the vote in her home state in an election September 4th (See Merkel’s Credibility Shattered; CDU Party Defeated in Regional Election, Merkel Coalition at Risk)

Spanish Prime Minister Zapatero’s Socialist Party suffered a massive defeat over his austerity programs in May. It was the worst rout in 30 years for Zapatero’s Socialist party. (See Prime Minister Zapatero’s Socialist Party Routed in Spanish Elections; Antinuclear Greens Surpass Merkel’s Party in Local German Vote)

In Finland, True Finns party chairman, Timo Soini launched a scathing and accurate attack against Jean-Claude Trichet, Jean-Claude Junker, and the ECB for its policy raping taxpayers of various countries to pay back German, French, UK, and US banks that made stupid loans for stupid reasons. (See True Finns Party Chairman: Greece, Ireland and Portugal Ruined; Gangrene Spreads; Enron Looks Simple; Spain Next Zombie)

German Chancellor and French President oppose Eurobonds (see Merkel, Sarkozy Reject Euro Bonds and Expansion of Rescue Fund; What Does it Mean? Middle of the End for Merkel)

89% of the German population oppose the expansion of the EFSF and doubt that ever larger amounts will solve the debt crisis. 80% demand that parliament must agree each time before Germany can take on additional burdens and risks. 85% demand that financial institutions, rather than taxpayer, take the first losses when a country defaults. (see 90% do not want bigger bailout).

Marine Le Pen, a top French candidate who wants to “let the Euro die” is polling ahead of French President Sarkozy (see articles below)
The last two bullet points are from Bailout Rebellion in Germany, on ZeroHedge. Here are expanded excerpts from the original articles.

French President Nicholas Sarkozy May Be Ousted in Preliminary Voting

In French elections, the top two candidates face a runoff in the national elections. France 24 reports New poll shows far right could squeeze out Sarkozy

Marine Le Pen, leader of the anti-immigration National Front (FN), is projected to win enough votes to knock out President Nicolas Sarkozy from the second round of next year’s all important 2012 presidential election, the French daily Le Parisien’s revealed on Thursday.

The poll confirmed a previous Le Parisien survey conducted in early March that gave Le Pen a considerable head start over Sarkozy, and even a small edge on IMF boss Strauss-Kahn. The March survey said Le Pen would gather 24% of French votes, beating Strauss-Kahn’s 23% and Sarkozy’s 20%.

In Thursday’s survey Strauss-Kahn climbed to 30% and Le Pen dipped down to 21%. Either way, the figures makes Le Pen a credible candidate in the 2012 race. Those polls were conducted in April before the Strauss-Kahn affair and I have not been able to find a more recent poll.

Marine Le Pen Says “Let the Euro Die”

The results for Le Pen are very interesting because of her stance on the Euro. Via Google Translate, please consider M. Le Pen says “let the euro die”.

We must “let the euro die a natural death,” means of reassuring the markets and revive the economy, said the president of the Front National Le Pen Marine, interviewed this morning on France Info.

Asked about the remedies it proposes to end the economic crisis, she said that we must “first stop bailouts repeat: there was Greece, now there will be Cyprus, Italy, the Spain … ” “There are masses of savings to do,” she said, particularly expenses related to immigration. “The cost of the AME (State medical assistance for undocumented) explodes, there are 20 billion euros of social fraud against which nothing is done,” she added, saying that “of 60 Vitale million cards, 10 million are false, that qualify for benefits unjustified “.

The market clearly says “Time’s Up”, yet politicians cannot agree on one major thing, and to top it off, voters are fed-up with austerity measures, bailouts, and politicians.
Clearly Le Pen is an anti-Euro, anti-immigration candidate and that is just the kind of message that can easily catch fire in this environment.

Merkel Proposes “Two Speed Europe” in Divide and Rescue Plan

Given that 17 countries cannot agree on anything, and voters are in open revolt of current leaders, it is preposterous to believe a “Two-Speed” Europe is the answer.

Merkel discarded “Two Speed Europe” long ago, but the plan is back in play as noted in Berlin Lays Groundwork for a Two-Speed Europe

The chancellor is planning her next political policy reversal . Until very recently, she has insisted that she was firmly opposed to creating divisions within Europe. But under the pressure of the euro crisis , Merkel has recently been thinking about abandoning the concept of a unified EU — and assigning a key role to [Belgian politician and president of the European Council] Herman Van Rompuy in the process.

A New Power Center?

Today, it is primarily Great Britain that is preventing the EU from growing closer together.

Merkel, though, has had enough — and is now planning a two-speed Europe. It would mean tightly interlocking the countries of the euro zone, possibly by means of a separate treaty that would apply in parallel to the EU Treaty of Lisbon. This was the concept German Finance Minister Wolfgang Schäuble proposed last week to the leadership of his party, the center-right Christian Democratic Union (CDU). Merkel sees Van Rompuy, who already chairs the council of the 27 EU leaders, as the head of the new power center.

In addition to the club of 27 nations that primarily manages the common domestic market as it has done until now, Merkel envisions a tight alliance of the 17 euro-zone members — one which would unify their fiscal, budgetary and social policies. This would create a two-class club, raising questions like: What happens to the European Commission? Will it still be responsible for economic matters in the euro zone, or will there be a new organization? The same questions apply to the European Parliament and the European Court of Justice in Luxembourg. Would all of these institutions have to be duplicated, meaning even more bureaucracy, effort and expense?

There are no answers yet to these questions, and there is already plenty of skepticism. The European Commission is just as opposed to Merkel’s plans as most members of the European Parliament and many smaller EU countries are. They also have some within Merkel’s own ranks raising their eyebrows. “We will not rescue the euro by creating more and more committees and instruments,” says Horst Seehofer, the chairman of the CDU’s Bavarian sister party, the Christian Social Union (CSU).

That is precisely what Merkel has in mind. She can draw on a concept known as “Core Europe,” which was developed in the 1990s by the then-chairman of the CDU/CSU parliamentary group, a certain Wolfgang Schäuble, who now serves under Merkel as finance minister. Both have established various measures to rescue the euro in recent months, some for the EU as a whole and others exclusively for the 17 euro-zone member states.

For starters, blaming this on the UK is absurd. The UK was smart to stay out of this mess.

The article continues …

Giving Up Sovereignty

The scope of a joint corporate tax proposed by Merkel and Sarkozy at their meeting in mid-August is also likely to be expanded beyond the two largest member states. “This is much more broadly conceived,” says a source within the German government. The two leaders envision a largely uniform tax for corporations within the euro zone.

Ireland refused to give up its tax advantages, and why should it? Indeed Ireland ought to tell the EU to stuff it right now and leave. Tax advantages are the only way Ireland has to grow out of this mess.

Part 2: A New Shadow Government for the EU

But that isn’t enough for Merkel and Sarkozy. They want the 17 leaders of the euro zone countries to convene for a summit twice a year, with Van Rompuy serving as its permanent chairman.

The Belgian would also receive a bureaucratic structure for his new responsibilities, giving the Euro Group its own secretariat. According to initial ideas, the new agency would be appended to an existing European Council secretariat, so that the separation doesn’t seem too obvious.

The group of finance ministers of the euro zone, which prepares the groundwork prior to meetings of heads of state and government, may also be strengthened. An idea being considered is to provide it with a full-time chairman, who would serve as a contact for Van Rompuy. Luxembourg Prime Minister Jean-Claude Juncker has taken care of the duties until now. The new chairman would be a former finance minister, making him more acceptable to a group of his peers.

While that is still in the planning stages, it has already been resolved that the working group of finance state secretaries will have a full-time chairman with his own team of employees. The body, with the cumbersome title Eurogroup Working Group, does the detail-oriented heavy lifting ahead of finance minister meetings.

In short, a kind of shadow government is currently taking shape in Brussels. But officials in Berlin have begun considering ideas which go even further. Merkel, for example, is thinking about introducing a right to file complaints before the European Court of Justice against euro-zone member states that violate the Stability Pact. Such a move would require an amendment to the Lisbon Treaty.

Merkel’s Mind is Fried

Merkel’s mind is clearly fried. How many years would it take to get agreement on something like that? Even two years is too long. She will be long gone.

It’s time to start asking serious questions like …

Is the Euro Worth Saving?

Regardless of what you or I may think, that question is where European voters come in. From that standpoint it does not look pretty.

German Chancellor Merkel, Spanish Prime Minister Zapatero, Italian Prime Minister Berlusconi, and Greek President George Papandreou will all be gone after the next set of elections.

French President Nicholas Sarkozy may bite the dust as well, and if he does it may be to a vehemently anti-Euro candidate.

All it takes is one government to say “to hell with this” and the whole mess unravels.

The current set of politicians all want to “save the Euro”. But what did the Euro buy Greece, Ireland, Spain, or Portugal except misery?

Even German and Finland voters wonder it bought them.

Eurozone Breakup Inevitable

Merkel’s half-baked proposal raises more questions than answers. The market (and voters) will not possibly wait for details of her proposal to get hashed out. If this is the best Merkel can come up with, a Eurozone breakup is inevitable.

Gold Gains as Money Markets Have Almost Stopped Functioning

Posted in Blogroll on September 9, 2011 by Minimux

U.S. DOLLAR gold bullion prices rose to $1853 an ounce Thursday morning London time – 3.5% down on Tuesday’s all-time high.

Major commodities fell while stocks and government bonds were slightly up, on a day which saw both the European Central Bank and the Bank of England leave monetary policy unchanged.

“Gold continues to trade in a wider and more volatile range,” noted one London-based dealer this morning.
“Most sell orders are parked close to the $1900 level,” added a gold bullion dealer in Singapore.

“So long as we stay in the range of $1800 to $1900, the bullish trend is pretty much intact.”

On the downside, however, “a break of $1704 would confirm a double top is in place and would target $1488 on a measured move,” reckon technical analysts at bullion bank Scotia Mocatta.

Prices for silver bullion meantime rose to hit $42.38 per ounce around lunchtime – a 4.5% move in less than 24 hours.

The European Central Bank left its main policy interest rate unchanged at 1.5% on Thursday. Jean-Claude Trichet is due to give his penultimate post-decision press briefing on Thursday afternoon, which will be watched for hints of where ECB policy might go next.

“The debate in the markets has moved to rate cuts but I doubt it will happen,” says Gilles Moec, co-chief European economist at Deutsche Bank in London.

“The situation is very, very bad, the money markets have almost stopped functioning.”

The ECB has raised rates twice this year – in April and July – each time citing the risks of inflation.
Trichet’s language at the press conference “will probably shift to neutral on inflation and downside risks to growth, which is enough to flag that the ECB is on hold,” reckons former ECB economist Laurent Bilke, now at Nomura.

“It is very unlikely that the ECB would do a massive U-turn so soon…that is just not how it operates.”

“The experience of late 2008,” counters Jacques Cailloux, chief European economist at Royal Bank of Scotland, “indicates that the ECB can change course very quickly.”

In July 2008 he ECB raised its rate from 4.00% to 4.25%. Following the collapse of Lehman Brothers later that year, however, the ECB cut its rate seven times between October 2008 and May 2009, when it reached 1.00%.

Here in the UK, the Bank of England’s Monetary Policy Committee voted Thursday to leave its interest rate at 0.5% – where it has been since March 2009. The MPC also voted to leave asset purchases at £200 – rather than increase them with a second round of quantitative easing.

“The time to launch QE2 has arrived…in order to avoid the risk of a double-dip recession,” said Graeme Leach, chief economist at business lobby group the Institute of Directors, speaking before the announcement.

Over in the US President Obama is due to give a speech on job creation later on Thursday, where he is expected to outline proposals worth around $300 billion in spending and tax cuts.

“We don’t feel that the plan will be received by market participants as a cure for the US economy’s problems,” says Marc Ground, commodities strategist at Standard Bank.

“Consequently, the current optimism should prove to be short-lived, with a return of investors to safe-haven assets imminent…we feel sentiment will soon turn in favor of gold, as uncertainty and Eurozone concerns are reignited.”

Shortly after taking office in January 2009 Obama announced a stimulus package worth around $800 billion. The American Recovery and Reinvestment Act became law the following month.

An estimated $710 billion in stimulus funds has been spent since, according to US government-run website The unemployment rate for August was 9.1% – up from 7.8% when the stimulus package was first announced.

The Organisation for Economic Co-operation and Development announced Thursday that it has significantly reduced its global economic growth forecast.

“Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up,” said OECD chief economist Pier Carlo Padoan.

The OECD now thinks that G7 economies excluding Japan will grow at an annualized rate of less than 1% for the remainder of the year.

Why Invest in Gold, Silver and Platinum Bullion?

Posted in Blogroll on September 9, 2011 by Minimux

There are many reasons why pension fund managers, private investors and even governments are beginning to add bullion to their portfolios. Perhaps the most important reason for this shift is that bullion provides superior insurance in times of financial uncertainty such as we are facing today.

Until governments solve their debt problems and no longer need to debase their currencies through unbridled money creation, a fully diversified portfolio should include gold, silver and platinum both for wealth protection and growth.

Portfolios consisting of a mix of stocks, bonds and cash are not protected or fully diversified as correlations between these three asset classes have been increasing since 1969. Fortunately, as these three traditional classes become more correlated, one asset class, precious metals, grows more negatively correlated. When bonds, stocks and cash fall in value, precious metals bullion tends to rise and vice versa. Therefore, a modern portfolio will gain protection as well as growth from an allocation of at least 5-15 percent to precious metals.

Figure 1 shows how gold has outperformed all major asset classes during the past decade.

Why Gold?
Gold provides wealth protection because it maintains its purchasing power better than paper currencies. Research shows that throughout history, every paper currency ever printed has eventually lost purchasing power against gold. No fiat currency detached from gold has succeeded as a stable store of value, and yet no gold backed currency has ever failed. At present the world’s major currencies are headed along a well-trodden path to loss of purchasing power.. As we see in Figure 2, the Japanese yen, the British pound, the euro and the US and Canadian dollars have lost over 70 percent of their purchasing power against gold in the past 10 years alone.

Figure 3 takes a longer view. It shows how the same currencies, including the venerable Swiss franc, have performed against gold since President Nixon removed the US dollar, the world’s reserve currency, from its final international peg with gold. This loss of purchasing power is the direct consequence of an unprecedented 40-year economic experiment during which none of the world’s major currencies was pegged to gold.

Currencies lose purchasing power against gold for one simple reason: Currency supplies are expanding faster than gold supplies. Bullion is the one form of money governments cannot artificially multiply. Since 1980, above-ground gold bullion supplies have risen, on average, about 3 percent per year. Figure 4 shows a comparison with the much more rapid rate of currency creation provided by MZM, one of the most reliable indicators of money supply.

Like a spinning top must continue spinning or fall, our modern economic system depends on perpetual growth. This is one of the most fundamental features of the debt-based fiat currency system. The greatest threat to its health is slowing growth or deflation. The threat of deflation requires central banks to create vast amounts of money to compensate for lack of natural growth. This in turn creates inflation, as the root cause of inflation is currency debasement. Since there is no historical precedent for the worldwide levels of debt we currently face, it is impossible to predict when this cycle will end.

In fact, as we can see by the US debt chart (Figure 5), debt levels are growing exponentially. In this sort of situation, it is difficult to predict the outcome.

Currencies Fall While Gold Remains Stable
In truth, gold is not rising in value; currencies are losing purchasing power against gold. It is an inverse relationship and this implies the price of gold can rise as far as currencies can fall. In his insightful book, Hard Money: Taking Gold to a Higher Investment Level, pension fund manager Shayne McGuire makes an interesting point about this historic pattern Although there are only 30 recorded cases of hyperinflation (where goods rise at least 50 percent per month), all were caused by currency debasement to compensate for slowing growth. This debasement (a word derived from the Roman practice of hollowing out gold coins and filling them with base metals) is happening worldwide. Currency printing is the only tool central banks have to fight the deflationary consequences of outsourcing, high unemployment, an aging population, endless war and the interest payments on the debt they are creating.

Hyperinflation is therefore a very real possibility. If this were to happen, how much will an ounce of gold cost when a wheelbarrow of dollars is required to buy a loaf of bread?

Gold Bullion is No One’s Liability
Gold is money that banks and governments cannot expand. Precious metals bullion is one of the only forms of money that can exist outside of the world’s banking system and beyond the control of bankers and politicians. Buying gold is therefore portfolio insurance against the failure of the policies and practices of banks and governments. Buying gold provides an opportunity for individuals to regain a sense of control or sovereignty over their financial lives. Gold owned outright is one of the few assets that does not rely on an issuer’s promise to pay. This applies only to gold bullion or gold coins purchased and held in allocated storage or at home. Gold stocks, ETF shares, even bank certificates are paper proxies for real ownership and will likely be difficult to redeem in kind at the time of financial crisis–the time we will need our gold the most.

Risk Management
Gold bullion is significantly less volatile than gold stocks. Even the best gold stocks sell off in a stock market decline, as we saw in the fall of 1987 and the fall of 2008.

Supply and Production
Despite gold’s rising price, gold production over the past two decades has averaged an annual increase of only 0.7 percent. Even future growth shows little chance of increasing significantly. To quote a recent report by Standard Chartered:

“In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.” ~ Standard Chartered

There are many reasons for this. The large, multi-million-ounce deposits, whose signature is visible from aerial magnetic mapping, have likely already been found. During the past two decades, only a handful of very large deposits have been discovered, and these are in the far north or in politically sensitive countries like Ecuador. To quote the same Standard Chartered report:

“There are few large deposits, and most of the mines have difficult geological and metallurgical conditions.”

Even when gold is discovered, there are many new hurdles to overcome on the road to production. Environmental restrictions, the threat of nationalization, heavy taxation and exorbitant infrastructure costs are but a few.

South Africa led the world in gold production for years. In 1970 South Africa produced 1,000 tonnes of gold, yet only produced 200 tonnes in 2010. As we see in Figure 7 this is a global problem.

Because of rising energy costs, the largest component of mining expenses, new Standard Chartered estimates that, to be economically feasible, new “greenfield” projects will require $2,000-per-ounce gold, and existing projects will require $1,400-per-ounce gold.

At the end of 2010, according to the Standard Chartered report, the world had only 19.2 years of gold production left at the current rate of production.

1. Central Banks

After nearly two decades of selling, central bankers are re-allocating to gold to protect against further loss of currency purchasing power. In 2009, they began to reverse this generational trend by becoming net buyers of gold. Central banks will continue to be the largest buyers of gold over the coming decades.

In Figure 8, the 2010 figure does not include the 454 tonnes that China admitted to buying secretly over the previous six years.

Most of the emerging economies, whose central banks are the most aggressive buyers, have a very low percentage of their reserves in gold, and a much smaller ratio than first-world central banks. To reach parity, they will need to add thousands of tonnes to their reserves. The Chinese central bank for example, which has only 1.6 percent of its reserves in gold, plans to raise its reserves from around 1,100 tonnes, where they stand today, to 6,000 tonnes. This represents over two years of global production. Unofficially, they have stated a goal of 10,000 tonnes.

2. The Public

Of course, there will be significant competition from the newly affluent developing world’s investing public who wish to protect family wealth. During the gold mania of 1979-1980, the Chinese public were not allowed to participate. Today their government encourages them to put 5 percent of their savings (and China has one of the highest savings rates in the world) into gold bullion. The Chinese public, like many of the principal buyers of gold bullion, remember the destruction a currency crisis can cause, as they experienced over 4,000 percent inflation per month between 1947 and 1949. They will increase their buying as they see currencies continue to lose purchasing power. In 2010, Chinese and Indian buying alone accounted for nearly 60 percent of annual global gold production from mines.

3. Large Funds

Central banks and the public will have competition from pension funds, sovereign wealth funds, insurance funds, mutual funds, hedge funds, private equity funds and private wealth funds–which have, collectively, over $100 trillion in assets under management (“AUM”). Pension funds with AUM of approximately $24 trillion currently have about 0.15 percent of their assets allocated to gold bullion. In other words, they have not even begun to move into gold. Fund portfolio managers have avoided gold over the past two decades, as it pays no interest or dividends. Yet funds invested in stocks and bonds have lost an average of 24 percent of their value over the past decade. Had they owned gold during this time, these losses would have been mitigated or erased. The large funds, the real movers of the financial markets, are beginning to acknowledge the need to hold gold in their portfolios. If they allocated only 5 percent of their AUM to gold, it would trade at between $5,000 and $10,000 per ounce.

Competition will be Fierce
As currencies continue to lose purchasing power worldwide, and more people come to understand the difference between bullion ownership and proxy gold ownership, the competition for the world’s available gold bullion will be fierce. Currently there is over $200 trillion in world financial assets, and about $3 trillion in gold bullion. Most of that is privately held or held by central banks, and these major holders are highly unlikely to sell at any price.

Much of what has been discussed about gold applies to silver as well as platinum, but all three metals have their own unique properties and all have resumed a position as money.

Why Silver?
Silver is money, but it is also an irreplaceable industrial metal and, unlike gold, silver is used up in the many processes for which it is essential. Silver’s industrial applications are growing on a daily basis in order to keep pace with rapid developments in technology.

Geologically, silver occurs in larger quantities than gold, and is therefore easier to mine: it remains where it is formed, whereas gold travels through water and seeps into deep veins. Silver also has a lower melting point than gold and is easier to refine. These are two reasons why silver has always been less valuable than gold; however, silver shortages are becoming greater than gold shortages because of a number of unique conditions it faces today.

In 1980, even with the silver price at a historical high, 4 billion ounces of above-ground silver existed. Today, because of silver’s dual role, only 1 billion ounces exist.

Silver has a Historic Role as a Monetary Metal
Silver, like gold, is a monetary metal and a safe haven, and it cannot be debased like modern fiat paper and electronic currencies. Throughout history, silver has been used as money in more regions and countries than gold. Like gold, silver meets the criteria for universal money: it can be easily divided into equal parts, it is found worldwide and it is extremely durable. In times of extreme economic crisis, silver is more functional as money than gold, because its lower value makes it more practical as a medium of exchange.

Silver is Undervalued
Silver remains historically undervalued, even more so than gold. In 1980, when record amounts of silver were stockpiled, the gold:silver ratio was 16:1. Currently the ratio is fluctuating between 30 and 55. At a 16:1 ratio, silver today would be $93 an ounce when compared to the price of gold.

Silver’s Short Position
One of silver’s most unique features is its disproportionately large short position on the COMEX that has yet to be covered. Although “commercial traders” in most markets are commercial producers who wish to guarantee a fixed price for their corn or their copper, in the precious metals markets, bullion banks hold the largest short positions. Currently, the COMEX short position of the eight largest traders represents one-third of the total one billion ounces of above-ground silver bullion in existence.

Figure 10 shows the amount of silver short positions held by the four largest traders, and compares the days of production it would take to cover this short with other commodities.

Silver used in Industrial Processes
Silver has industrial uses that no other material can replace. It is malleable and ductile, and is capable of being formed into fine jewellery, hammered into thin sheets and extruded into microscopically thin wires. It is a superior conductor of heat and electricity. It is highly reflective, which is why it is used in mirrors. It also has anti-microbial properties that make it ideal for surgical applications, and as an additive to everything from paint to clothing.

Silver Demand
Because of its dual role, silver has never faced greater demand than it does today. In 2010, total fabrication demand grew by 12.8 percent to a 10-year high of 878 million ounces, and use in industrial applications grew by 20.7 percent to 487.4 million ounces.

Compared with gold, we see the consequences of silver’s industrial use. From the beginning of recorded history, 2 billion ounces of the 5 billion ounces of gold mined remain in bullion form today. Only 1 billion of the 45 billion ounces of silver mined are currently in bullion. As silver’s industrial role is more important than gold’s, a silver shortage would have more negative implications than a gold shortage.

Silver Supply
Although silver mine supply rose by 2.5 percent to 735 million ounces in 2010, the yearly amount of mined silver has been less than its demand for the last 15 years. There are very few pure silver producers; most silver is mined as a by-product of other metals. This could be problematic in the event of an economic slowdown. Currently Mexico leads the world in silver production, followed by Peru.

Why Platinum?
Including all three precious metals in an investment portfolio provides greater diversification within the precious metal asset group, and offers reduced volatility as each metal has unique economic properties.

Platinum is Also Money
In the bull market of the late 1970s, platinum matched the gains of both gold and silver, which suggests that platinum was acting as a monetary asset during this inflationary period/dollar crisis. Although platinum coins were used in Russia in the nineteenth century, the scarcity of platinum, combined with its much higher cost of production, make it a poor choice for this purpose. It has served as a store of economic value for 300 years, however.

Rarest Precious Metal
Platinum is the rarest of the precious metals and its price reflects this. It takes approximately 10 tonnes of ore and six months of mining to produce a single ounce of platinum. Platinum is 30 times rarer than gold. Unlike gold and silver, which are mined in almost all areas of the world, most of the world’s platinum comes from only two countries–Russia and South Africa. All the platinum ever mined would occupy as space of approximately 25 cubic feet.

Record Price
Even though platinum hit a record high of $2,252 per ounce in 2008, it still has some distance to go to reach its inflation-adjusted high of $2,630. Since demand for platinum applications keeps growing while mine supply remains relatively fixed, the price of platinum is likely to continue rising.

Limited Source of Supply
Since 1997, demand for platinum has exceeded mine production and global platinum demand continues to grow to record highs. Unlike gold, there are no large above-ground supplies of platinum.

Currently, South Africa accounts for 80 percent of the world’s annual production of platinum and contains 88 percent of the world’s platinum reserves. This is one reason why platinum prices can be more volatile than either gold or silver prices – they are especially sensitive to political unrest in South Africa.

Inelastic Demand
Platinum has far more industrial uses than gold or silver. Unlike gold, over 50 percent of the platinum produced is consumed (destroyed) in industrial applications. Platinum is indispensable for many industrial uses, such as catalytic converters in diesel engines. As the oil price increases, demand for diesel engines increases, and so does demand for platinum.

Leading Inflation Indicator
According to a study by Wainwright Economics, a Boston-based investment research and strategy firm, platinum is the leading indicator of inflation. While gold and silver lead inflation by 12 months, platinum leads by 16 months. This was confirmed in the current bull market; the rise in platinum prices started in 1999, while gold and silver’s rise began in 2001.

Ultimate Portfolio Protection
According to David Ranson, president of Wainwright Economics,

“The only asset class that is better than gold as an inflation hedge is a basket that includes silver and platinum.”

The Economic and Financial System Is Coming Unglued

Posted in Blogroll on September 9, 2011 by Minimux

[Are you prepared to face the coming debt storm? Learn more about it, including how to protect yourself and your assets, by joining us for a free online event. The American Debt Crisis will be held September 14 at 2 p.m. EDT. Sign up today.]


David Galland – We’re Living in a Degraded Democracy
Stefan: Hi everybody, it’s Stefan Molyneux, host of Conversations with Casey. I have on the line David Galland. Thank you so much, David, for taking the time to chat today.

David: Nice to be here.

Stefan: So, we are seven-tenths of the way towards fascism in the United States. I wonder if you could expand upon that. I sort of get a sense that that’s probably true, but you have a little bit more than my gut instinct – you actually have some pretty professional opinions to work with on that.

David: Well, all the elements for fascism are in place. We have a monetary system that is accountable to no one and that’s a very good start. If you think about it, the way that the monetary system is structured, the government at this point can literally spend money on anything. They talk about capping the federal deficits and all that, but they’ll get past that in no time at all. Probably by the time the viewers are watching this they will have announced a big deal, you know, that they have raised the debt cap. And you know, once you have – if you pin your money to nothing, if you have a monetary system that is based on nothing, then you can afford anything. You can afford all the wars you want, you can afford all the bureaucracy you want; and so they have. That’s a first step.

I mean, we’ve – just as an example, here in the little town in New England where Casey Research is located, they have a – they’ve just finished building a massive new Homeland Security center. This is a town of roughly 4,000 permanent residents; it’s a tourist town. It’s the kind of place where the worst crime you’ll ever see is somebody stealing skis from a ski slope, and yet we have something like 36 policemen. We’ve got this huge, brand-new Homeland Security center. Why? Well, because after 9/11 and the overreaction of 9/11 the government made this money available because it could make the money available, because there is nothing stopping it from doing that. And there’s all these local police departments, which should have an “Andy of Mayberry” type police force, took the money and they spent it, and now we’ve got a semi-militarized local operation. So this has gone on and this is multiplied right across the country… and the world.

Stefan: And of course, the decisions that people make in expanding the public sector have immediate implications in payroll, but I think what America is really facing are the long term implications of unfunded pensions that just run into the hundreds of billions of dollars. It’s a lot of the stuff that is not really counted in the public calculation of the debt, which is more immediate obligations, but the unfunded liabilities run $75 to $100 trillion according to many estimates. That’s not something that you see, which makes the whole conversation about should we have two trillion here or there ridiculous to anybody in the know.

David: Oh, absolutely. Again, on the point about whether we’re sort of on the way to a fascist state – and I – this isn’t just the US – it’s important that, you know, people understand this is all over the world. At this point, none of these governments is operating on anything that remotely resembles sound principles. They’re operating on a number of different priorities and a number of different interests – self-interests, because politicians after all are just people. So whatever it takes to kick the can down the road, they’re going to do. You mentioned $75 trillion in unfunded liabilities, absolutely. Because at this point, this is essentially sort of a rising tide of bureaucracy over the last hundred years that is cresting at this point. And they have done this because there are no real operating principles other than buying the votes that they need to get re-elected and to stay in office for as long as they can, and then they pass the baton to the next bureaucrat and the system continues. But it’s reaching the point where, I think, within a relatively short period of time it’s got to come to an end.

Stefan: Now you’ve written an article recently which I found very interesting – I just shared it through my Facebook as well – it’s called The Greater Depression. So you have the Great Depression and now we’re looking at the Greater Depression. I wonder if you could talk about the mechanics and the future as you see it as we go into this abyss.

David: Ultimately, what we’re faced with right now and this is, I think, just some fundamental principles – because there are so many aspects of what’s going on in the economy today that it makes it for most people – for virtually all people – it makes it very hard to really understand what’s going on. So sometimes you just have to sort of step back and ask a few questions to try to get some sort of a compass, if you will. And first and foremost the crisis we’re in right now is caused by debt, too much debt. As you mentioned before $75 trillion in government obligations – everybody knows that money is never going to get paid. So we’ve been brought to this point of extreme government borrowing. Who would have thought we’d see $1.5-trillion deficits? I mean, nobody – five, six years ago if you would have asked anybody on this planet if the US government could run a $1.5-trillion deficit they would have said no way. Well, here we are. So all of the conditions of what this – you can call it a debt-induced depression, all of the conditions that sort of brought us to this place have not improved since the beginning of this crisis; they’ve only gotten worse.

So what’s the ultimate outcome of this? Well, what’s the one thing that a heavily indebted person or an entity like the government can’t handle? And it’s rising interest rates. You can’t afford for the bank to bump your payments up to, you know, 20% because you’ve missed a payment. Well, the same thing’s true of the government and we are now – we are still – the US interest rates are still bouncing around, you know, all-time lows. It’s completely – it’s a complete aberration. And it can’t last. So why things are going to get worse is because interest rates have to go up. Even if they return to sort of a more normal five to six percent range, from a historical standpoint it would be devastating to the US economy. So the government is doing everything it can to try to get out of this trouble but there really is no way. They have very limited impact on long-term interest rates and if it wasn’t for the fact that Europe was such a basket case and that Japan was such a basket case right now, interest rates in the US would already be taking off but I don’t think we’re going to have to wait long for that and then things are going to get interesting.

Stefan: Let’s take a tour as you have done in a recent article around the world in eighty seconds, or so, because I think you have correctly identified that – I mean obviously North America is a basket case economically; South America has always had its problems economically; Europe is facing catastrophic debt situations; China is in pretty artificial command of the economy, Japan has had a twenty year recession/depression and now it is facing all of the problems that have come out of the nuclear power plant meltdowns. It really seems like it’s a perfect storm in a way, that there are not a lot of safe havens to go to even for good news, let alone for investor security. What are your thoughts about how all of this stuff is coming together at the same time?

David: Well, it’s scary. I mean, I didn’t coin the phrase “Greater Depression,” that was Doug Casey, my partner; and I think Doug had it exactly right. I think, you know, there has been so much of a, as I’ve said, this sort of rising tide of bad policy and extreme spending and a takeover of the economy – and not just the US economy, but all of the economies by these governments, the nation-states – that things have reached the point, people tend to think that things are going to stay the same and continue as they are, but they don’t. Sooner or later, history shows over and over again, things break, systems break, and I think we are very close to that.

I think it is important for people to understand that in – they look for the politicians to solve the problems, but to solve the current problem in America would require draconian efforts that would immediately cost the politicians their jobs. It would be, for a politician to stand up there as everybody watching this knows, and advocate deep slashes to Social Security or Medicare – and I am not talking about the stuff that they are talking about now, where modest little rearranging of the deck chairs over the next ten or twenty years, but real fundamental changes in the amount of government services being provided because all of these government services have grown and grown and grown over years now – and so to start cutting them back, every one of these government services has a constituency, people that depend upon it. You know, you start looking for cuts, and you say, okay, we have got to cut school lunches. You know, government didn’t used to give away school lunches. Well, now everybody is up in arms because you can’t cut the lunches of people because then they will have malnutrition and so on and so forth. Every single government bureaucracy has got a constituency. But the reality is that you can’t keep kicking the can down the road indefinitely.

Or put it another way: There is never a good time to fix this kind of a problem. So politicians will always make the choice to not actually address the problem, but rather to leave it to the next person’s watch. This isn’t – this would be a horrible time, absolutely a horrible time to fix the problems that face the American economy. Slashing the deficit, slashing the debt, slashing the government spending at this point would have catastrophic consequences to the average person. There would be riots in the street; but if you don’t fix it now, when do you fix it? Okay, well, do you fix it in the next year? No. Do you fix it the year after? The government will do whatever it can to keep pushing this down the road, but they can’t push it down the road much further.

Stefan: Well, it’s because fundamentally – and there are lots of reasons why politicians will not tell the truth to the population as a whole and say, “Look, we are not slashing spending if we go back five years in our deficits. You know, America and the world was not a rubble-strewn anarchic wasteland in 1995, and if all we do is cut spending back to that we will have made massive progress,” and people aren’t willing to just tell the truth and say, “Look, you people have become lazy and entitled and you have lost track of reality, we have lost track of reality, we have encouraged you to lose track of reality, so we really need to make decisions before reality makes those decisions for us in a much more brutal way,” but it seems hard to imagine anyone could get elected without sort of chanting, “USA Number One,” and actually telling the truth to the population, so it is almost like the market of the delusional population is driving politics in a way.

David: Oh, completely, because again – and this is nothing new, the people watching this know this – you know, you can point the finger at the politicians, but the people behind the politicians, the fact that, I think, Congress’s approval rating now is something like six percent, I mean it’s ridiculous, but come next election, most of those guys, most of the incumbents will be re-elected. And anybody who is elected to replace anybody who gets voted out will be just as bad as the people that they are replacing.

So you know, you have got a system, you’ve got a situation here where we live in a degrading democracy, you have to just face that fact. It is degrading, people have been trained – just like they were in the Soviet Union leading up to that collapse – they were trained to look to the state for virtually everything, and once you have stopped relying on yourself, once you start relying on the nation-state to take care of all the things that you think it needs to take care of, or that you would like it to take care of, you know, the whole thing comes crumbling down and we have absolutely reached that point. If you look at it – and again, very few people, I would say it’s sort of the fringe, if you will – people like yourself, Doug and the editors at Casey Research, and you know, the people that might be considered, you know, outside the mainstream, will talk about things like the $75 trillion of federal obligations, and – but it’s there, it’s a reality, it’s a fact, yet the mainstream media pretends that it’s not there and they do their calculations about the government covering its costs and debts and all that stuff based upon, you know, really falsified information. I mean, so if you can’t even acknowledge the scale of the problem – you can’t acknowledge the actual reality of the problem – how can you begin to come up with a solution? You can’t. And fortunately for the US, we had a great economy, and it’s still better than most. We’ve managed to get to this point although it goes far down the path of corruption, if you will, as we have, but the monetary system, at this point, is absolutely coming unglued, and I don’t think we are going to have to wait much longer. I mean, I think we might have a year before this thing really starts to break down, but I don’t think we have got much more than that.

China Confirms Gold Price Suppression

Posted in Blogroll on September 9, 2011 by Minimux

In a piece of news that certainly delights GATA, Wikileaks published a cable going back to 2009 in the year that European central banks halted their sales of gold. It said the following:

“The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries toward reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the Renminbi [Yuan].”

Chinese Gold Accumulation
In the five years from 2003 to 2008 china added 454 tonnes of gold to their reserves. They amassed these reserves in a government agency which handed over the extra tonnage to the People’s Bank of China in 2008. We believe that they continue this policy of using a non-central bank agency to gather gold for their reserves. If they do stick to this policy they should make their next announcement in 2013. The volumes of gold added up to 2008 could be seen as adding 91 tonnes a year since 2003 or, more likely, adding the growing domestic gold production directly to their stockpile. If that is the case then we expect an additional amount of at least 2,000 tonnes to be passed from the gold buying agency to the People’s bank of China.

With the government licensing so many international banks to import gold to China, Chinese citizens are buying directly from these banks and therefore the international market. The accumulation of gold reserves in China is therefore a total of the two sources. So don’t be surprised if China is holding [citizens plus central bank] around 5,000 tonnes or more by 2013. This is still a small amount compared to their dollar reserves. But central banks don’t look at gold in quite the same way as mere mortals.

Gold Price Suppression
The Chinese belief that the U.S. and Europe have always suppressed the rising price of gold cannot be refuted reasonably. The gold sales by the U.S. and then in the seventies the gold sales by the I.M.F. were direct attempts to squash the gold price in the pretence that gold would be sold out of the system.

In 1978 the Second Amendment of the IMF Articles was intended to delete gold from the international monetary system. The amendment followed the failure of previous attempts to establish a new international monetary system. In particular these included the failure of European countries to force the United States to either settle its deficit in gold, or else devalue the dollar against gold. This Second Amendment of the Articles barred members from fixing their exchange rates to gold and removed the obligation on members to conduct transactions in gold at the official gold price.

Not only did the United States refuse to keep gold in the system, it then led a crusade against gold (while being careful to keep a very large strategic stock of gold in its own reserve, sealed off from the outside world).

Symbolizing the plan to drive gold out of the system, the IMF was instructed [the U.S. held the deciding vote in the I.M.F.] to dispose of 50 million ounces of its gold stock of 153 million ounces. It achieved this partly by sales to the market and partly by giving some gold to members in relation to their quotas.

Ironically, this exercise had the effect of spreading gold much more widely through the international community than ever before, and gave many countries a new interest in the gold market. Few countries showed any inclination to sell the gold handed to them, and in the vast majority of cases it continues to sit on their books. The later sales of gold were snapped up so fast that the U.S. realized that they would really have to sell all their gold, if they were to succeed, but they themselves valued gold so much they halted those sales.

Accelerated Sales
From the mid-eighties central banks took a different ‘tack’ on their anti-gold campaign. Just as there is not greater patriot than, “he who commits you to his cause”, the anti-gold campaign then allowed mining companies such as Barrick, to borrow central banks gold then sell it forward for around five years at a time when gold prices were falling. The mining companies then financed their own production, getting the gold price up-front plus the interest accruing for the five years [the Contango] and delivering their subsequent production back to the central banks. This caused an acceleration on the amount of gold produced by mining and swamped the gold market so much that the price of gold fell from $850 an ounce in the eighties to $275 by the end of the nineties.

1999 the First Break in the Anti-Gold Campaign
The first fracture in the developed world’s anti-gold campaign came when the Governing Council of the European Central Bank decided that the national central banks participating in the euro area should include gold in the initial transfer of foreign reserve assets to the European Central Bank. The transfer was to take place on the first day of 1999, the launch date of the euro as a single currency. This action confirmed the importance of gold as a reserve asset. The Governing Council decided the initial transfer of foreign reserves would be to the maximum allowed amount of €50 billion. This figure was adjusted downwards by deducting the shares of those E.U. central banks which would not participate in the euro area at the outset i.e. to a total of approximately €39.46 billion. The E.C.B. agreed that 15% of this initial transfer should be in gold. Gold clearly enhanced public confidence a point made in the 2009 Chinese cable [above]. Despite the gold sales under the gold sale agreements, gold’s share of the ECB’s total reserves has grown considerably since then due to the sharp increase in the gold price. As at September 2010 the E.C.B. had 26% of its reserves in gold.

When the “Washington Agreement” was instituted in the year 1999 it attended the launch of the Euro as Europe’s currency. The “Washington Agreement” plus the subsequent European Central Bank Agreements were to sell ‘up to’ a ceiling level of 400 or 500 tonnes of gold and was intended to establish the euro as a major currency, without competing with gold. Like the U.S. sales of gold, there was no intention to get rid of gold as an important reserve asset, hence the strictly limited sales and the retention of the bulk of gold reserves in the different national foreign exchange and gold reserves. In it, they stated that gold would remain an important element of global monetary reserves, and agreed to limit their collective sales to 2,000 tonnes over the following five years, or around 400 tonnes a year. They also announced that their lending and use of derivatives would not increase over the same five-year period. (The signatory banks later stated that the total amount of their gold they had out on lease in September 1999 was 2,119.32 tonnes.)

The signatory banks accounted for around 45% of global gold reserves. In addition a number of other major holders – including the USA, Japan, Australia, the IMF and the BIS, either informally associated themselves with the Agreements or announced at other times that they would not sell gold. Including these, the proportion of gold reserves covered by the Agreement or a similar announcement rises to around 85%.

The announcement of the Agreement came as a major surprise to the market. It prompted a sharp spike in the gold price over the following days, but it also removed much of the uncertainty surrounding the intentions of the official sector. Once the markets had adapted to it, a major element of instability had been effectively removed with the introduction of greater transparency.

The Chinese are absolutely correct in believing that the U.S. and Europe have suppressed the price of gold! The evidence is glaring at us through history.

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