Monty Pelerin's World

Economic, Financial and Political Analysis

Archives for Economics

Is The Gold Manipulation Backfiring?

gold15 (2)The term “unintended consequences” is used to describe outcomes not foreseen by the central planner. It certainly describes most government programs.

For years, I have insisted that the term does not do justice to what actually happens. It is not strong enough to properly convey the results of major government actions. Hence, the “Pelerin Rule” was developed: Whatever the stated objective of a government program, the opposite will result.

There are innumerable examples of this law being fulfilled. The most recent is barely underway and the results are obvious. I speak of healthcare reform where the stated objectives were to cover more people, lower costs and improve the quality of medicine. As Obamacare rolls out just the opposite is occurring. People are losing their health coverage and health care costs are soaring. The deterioration in the quality of medicine will be apparent soon, especially once doctors begin leaving the profession.

Now the same phenomenon may be occurring in the gold market. In an effort to discredit gold, alleged government and bank interventions occurred that drove down the price. This action seems to have altered the gold markets in a way never intended. A move allegedly undertaken to tarnish gold’s luster purportedly in an attempt to protect fiat currencies and the manipulations of the paper gold markets by central and bullion banks appears to have brought physical gold, the last refuge from scoundrels, to center stage.  That is the opinion of The Golden Truth as expressed in the following article:

The Global “Fractional” Paper Bullion Market Is Collapsing

I wrote last week that there was a scramble going on globally by entities seeking to take physical possession of the gold on which they have a legal claim, most of which is sitting either in alleged “allocated” big bank bullion vaults or in alleged “allocated” accounts in Comex custodial warehouse vaults.

I also demonstrated mathematically, using the reported numbers on the CME website for precious metals futures open interest and warehouse gold/silver stocks, that the amount of gold represented by Comex futures open interest far exceeds the amount of deliverable gold on the Comex (the analysis is even more extreme for silver).  In fact, if less than just 10% of the buyers of June gold contracts demand delivery, the Comex won’t have enough gold to cover the legal claims.  For silver (July silver) it’s even more extreme.

This is a global problem and not just endemic to the Comex.  Globally, the legal claim of ownership on physical gold far exceeds the amount of gold represented by paper futures, LMBA forward contracts, leased gold and vault receipts.  The latter – vault receipts – is where the big banks in London have the most severe problem, as gold this is supposed to be sitting in “allocated” accounts under the name of the legal owner who bought and paid for those bars has been largely leased out.  I’ll get to that in a minute.

First, I received this comment from John Brimelow’s “Gold Jottings” report, which comes from Gerhard Schubert, head of Precious Metals at Emirates NBD, the largest banking group in the Middle East.  Keep in mind that Middle Eastern buyers demand physical delivery of their gold.  Here’s the quote from his latest weekly report:

I have not seen in my 35 years in precious metals such a determined and strong global physical demand for gold. The UAE physical markets have been cleared out by buyers from all walks of life. The premiums, which have been asked for and which have been paid have been the cornerstone of the gold price recovery. It is very rare that physical markets can have a serious impact on market prices, which are normally driven solely by derivatives and futures contracts…

I did speak during the week with several refineries in the world, of course including the UAE refineries, and the waiting period for 995 kilo bars is easily 2-3 weeks and goes into June in some cases. A large portion of the 995 kilo bars in the UAE goes normally into the Indian market, but a lot of the available 995 kilo bars are destined for Turkey, at this time. We heard that premiums paid in Turkey have reached anything between US $ 20 and US $ 35 per ounce.

The price hit of two weeks ago has triggered a serious scramble for physical gold and silver.  Reports like the above comment have been flooding from Europe, the Comex has had about 30% of its gold bars literally drained from the customer accounts of the Comex bank custodian vaults and the U.S. mint is running way behind on demand for silver eagles and some weights of gold eagles.  Ditto for the Canadian mint.

And then I get a call from a close friend in NYC last Friday.   His career has been in private wealth management in the private bank department of the Too Big To Fail banks.  He’s been looking for work and chats with old colleagues all the time.  He called my Friday and told me he just got off the phone with a very high level private banker from a big Euro-based TBTF bullion bank, but who was at JP Morgan until about six months ago.

This guy told my friend that there is a scramble by many very wealthy European families/entities to get their 400 oz bars out of the big bank vaults. He knows this personally, for a fact.  He said the private banker community is small over there and the big wealthy families all talk to each other and act on the same rumors/sentiment.  The Bundesbank/Fed and the ABN/Amro situations triggered this move.  He knows for a fact JPM tried to calm fears about 3 months ago by sending a letter to it’s very wealthy clients assuring them their bars were safe, in allocated accounts.  He said right now those same families are walking into the big banks like JPM and demanding delivery of their bars or threatening to take their $100′s of millions in investment portfolios to competitors.  His wording was “these people are putting a gun to the heads of private banks and demanding their gold.”

I know this information is good because I know my friend’s background and when he tells me his source is plugged in, the guy is plugged in. Not only that, my friend’s source said that there’s no doubt that someone like a John Paulson, not necessarily specifically him, but entities like him or it may include him, have held a gun to GLD and demanded delivery of physical in exchange for their shares.

Regarding the Bundesbank/Fed situation, recall that the Bundesbank asked to have some portion of its gold sitting – supposedly – in the NY Fed vault in NYC sent back Germany. The total amount is 1800 tonnes.  After behind the scenes negotiations, the Fed agreed to ship 300 tonnes back over seven years.  To this day, the time required for that shipment has never been explained.  Venezuela demanded the return of its 200 tonnes held in London, NYC and Switzerland and received it all within about four months.

And regarding the ABN/Amro situation.  ABN/Amro offered a gold investment account product that offered physical delivery of the gold in the investment account when the investor cashes out.  About a week before the gold price smash, ABN sent a letter to its clients informing that the physical delivery of the bullion was no longer available and that all accounts would be settled with cash at redemption.

I believe it was these two events that triggered the big scramble for physical gold by wealthy families/entities who were suspicious of the integrity of their bank vault custodial arrangement anyway.

In fact, what we are now seeing is the final stages of the paper gold/silver bullion market, which has grown at a parabolic rate over that last 13 years, and includes Comex futures, LMBA forward contracts, OTC derivatives – which is an even bigger paper market than the Comex – leased gold claims/contracts and warehouse receipts.

At some point there will be an even bigger “run on the bank” by those looking for delivery of the physical gold/silver that they have been “assured” is sitting in their “trusty” bank custodian vault.  I know for myself that I have seen enough from the JPM’s of the world to not trust anything they do or say.  I think a lot more people are finally coming to that same conclusion.  At some point there will be a complete collapse of trust in the paper monetary system and the price of gold/silver will really go parabolic, as the masses realize all at once – and far too late I might add – that everything that was rumored over the last 13 years about paper gold, gold leasing, etc is actually true.

The Issues With Gold

gold1sJohn Rubino and Gordon T. Long discuss the recent gold takedown. For anyone interested in gold, this discussion should not be missed. It also has implications for other markets. If there are no longer any rules or laws regarding market manipulations, what may happen in terms of equities, currencies and other markets?

Link

The question is whether there will be another smackdown or not. Mr. Long expects one; Mr. Rubino seems less committed to that position although does not rule it out. There are a number of reasons discussed as to why another knockdown is coming.

It Is All Coming Down

economy111As the stock markets of the world rise on a sea of liquidity, economies become increasingly dysfunctional. Credit and money creation is no remedy for economic distortions and mis-allocations. Liquidity can drive asset and commodity prices higher but it also leads to additional distortions. Credit and money creation is not an economic tool, it is a political tool. It is a means to fool people a bit longer.

welfareThe reality is that the massive Ponzi schemes of the social welfare states around the world are imploding. There is no mathematical way to sustain these schemes and no political will to stop them. As a result, these cancers are destroying the very societies and economies that support them. Their demise will drag down the economies and governments which allowed them. Nation-states may fall in the process.

Since the turn of the century, all government economic policies have been attempts to cover up the decaying programs of the welfare states. Nothing can be done to correct or maintain these Ponzi schemes. Nor can anything be done to avoid the inevitable reckoning that is coming as a result of impoverishing economies and people with these programs. Governments may defer the collapse, but only by increasing the ultimate pain and suffering that is incurred when the Piper appears for his due.

There is no economic recovery underway anywhere in the world, despite the pronouncements of governments and their media lackeys. An economic Armageddon lies ahead. The damage done ensures that there can be no escape from the coming cataclysm.

Michael Snyder, focusing on Europe, provides twenty signs that a Great Depression is already underway there:

The following are 20 signs that the next Great Depression has already started in Europe…

#1 The unemployment rate in France has surged to 10.6 percent, and the number of jobless claims in that country recently set a new all-time record.

#2 Unemployment in the eurozone as a whole is sitting at an all-time record of 12 percent.

#3 Two years ago, Portugal’s unemployment rate was about 12 percent.  Today, it is about 17 percent.

#4 The unemployment rate in Spain has set a new all-time record of 27 percent.  Even during the Great Depression of the 1930s the United States never had unemployment that high.

#5 The unemployment rate among those under the age of 25 in Spain is an astounding 57.2 percent.

#6 The unemployment rate in Greece has set a new all-time record of 27.2 percent.  Even during the Great Depression of the 1930s the United States never had unemployment that high.

#7 The unemployment rate among those under the age of 25 in Greece is a whopping 59.3 percent.

#8 French car sales in March were 16 percent lower than they were one year earlier.

#9 German car sales in March were 17 percent lower than they were one year earlier.

#10 In the Netherlands, consumer debt is now up to about 250 percent of available income.

#11 Industrial production in Italy has fallen by an astounding 25 percent over the past five years.

#12 The number of Spanish firms filing for bankruptcy is 45 percent higher than it was a year ago.

#13 Since 2007, the value of non-performing loans in Europe has increased by 150 percent.

#14 Bank withdrawals in Cyprus during the month of March were double what they were in February even though the banks were closed for half the month.

#15 Due to an absolutely crippling housing crash, there are approximately 3 million vacant homes in Spain today.

#16 Things have gotten so bad in Spain that entire apartment buildings are being overwhelmed by squatters…

A 285-unit apartment complex in Parla, less than half an hour’s drive from Madrid, should be an ideal target for investors seeking cheap property in Spain. Unfortunately, two thirds of the building generates zero revenue because it’s overrun by squatters.

“This is happening all over the country,” said Jose Maria Fraile, the town’s mayor, who estimates only 100 apartments in the block built for the council have rental contracts, and not all of those tenants are paying either. “People lost their jobs, they can’t pay mortgages or rent so they lost their homes and this has produced a tide of squatters.”

#17 As I wrote about the other day, child hunger has become so rampant in Greece that teachers are reporting that hungry children are begging their classmates for food.

#18 The debt to GDP ratio in Italy is now up to 136 percent.

#19 25 percent of all banking assets in the UK are in banks that are leveraged at least 40 to 1.

#20 German banking giant Deutsche Bank has more than 55 trillion euros (which is more than 72 trillion dollars) of exposure to derivatives.  But the GDP of Germany for an entire year is only about 2.7 trillion euros.

No doubt many are surprised at this list. After all, this news is not being reported. It is deliberately being ignored or covered up.

This is Europe and Europe is not America. It is impossible to disagree with that tautological sentence. But America’s economic situation is much like Europe’s. Our economy was stronger when the maelstrom began. Some of our numbers (CPI, unemployment, GDP, etc.) appear better, but they may be manipulated more than the comparable data in Europe.

Whether we are better off than Europe or not is irrelevant. The key point is that the American situation is bad enough on its own to be irreversible. A similar collection of statistics regarding America would be just as shocking as the list prepared by Mr. Snyder. Perhaps he will present such a list (or perhaps he already has), as this is one of his strengths.

humptydumpty (2)Suffice it to say that the developed world is choking on the debt and distortions driven by political mismanagement and the attempts to sustain an unsustainable welfare state. In an attempt to support increasingly failed Ponzi schemes, debt levels have surpassed the levels that can be sustained. Economies no longer grow or function properly under the debt and distortions it has caused. The attempt to sustain the political scam of welfare is about to sink the productive sectors of all developed economies.

It is all coming down. Humpty Dumpty cannot be fixed.

Did Government Try To Murder The Canary Before It Could Get Sick?

The Canary In The Coal Mine

The expression “canary in the coal mine” derives from the use of canaries in coal mines as a form of an early-warning for the miners. Wikipedia canarycoalmine (2)explains:

An allusion to caged canaries (birds) that mining workers would carry down into the mine tunnels with them. If dangerous gases such as methane or carbon monoxide leaked into the mine, the gases would kill the canary before killing the miners, thus providing a warning to exit the tunnels immediately.

Financial and economic analysts often use this metaphor to describe key variables. When the particular element representing the canary begins to misbehave, it is time to get the hell out of that situation. Depending upon the market, different variables can serve as the canary. Gold is often considered to be the King Canary, at least for those who are focused on maco-economic events, especially those resulting from massive government interventions in markets, money creation and interest rates.

The Take-down of Gold

The recent take down of gold appears to have been orchestrated by government via the banking system. Numerous websites discuss the circumstantial evidence that suggests government was involved. Simple statistics support something other than normal market behavior happened. Other analysts discussed reasons why a take-down of gold was important for government, the Federal Reserve and the banking system.

In a world of paper gold (ETFs and futures), it is not difficult to engineer a manipulation.

The gold crash occurred over a two-day period and received enormous publicity. That is exactly what you would expect if you wanted to frighten people away from gold. Contrast that with the silence that accompanied gold’s rise from $250 to almost $1,900. It was the best-kept secret bull market in history. Gold averaged about a 16% gain per year for 11 years and the public hardly knew.

So what happened since the collapse? Gold has made a rather nice rebound.

The Recent Movement In Gold

I will use GLD, the gold ETF, as a proxy for gold. On Thursday April 11, GLD closed at $151.26. Friday and Monday were the crash days. At the close on Monday (April 15), GLD was at 131.31. It was as low as 130.51 intra-day. Yesterday (April 25) GLD closed at 141.63. It hit 142.08 intra-day. The following daily chart summarizes the action:

goldapril

The huge drop was terrifying for many gold investors. Stops were triggered and gold went into free-fall.

In the eight trading days since the bottom, gold was up seven of the eight days. Of the twenty points GLD lost in two days (about 200 points in the price of Gold), more than 50% of the loss was recovered in the subsequent eight days. Whether this recovery is an elongated “dead-cat” bounce is for you to judge.

Political Importance

Three important factors likely motivated the recent take-down of gold:

gold and fiat mages (2)1. Gold as The Anti-Currency

Market manipulations by government are rarely telegraphed and often surreptitious. There are good reasons to believe that government was behind this plummet in gold prices and innumerable articles on the Web discuss this likelihood in great detail. Gold is government’s nemesis. When gold is doing well, it means fiat currencies are being counterfeited. That is exactly what is happening all around the developed world.

If you measure the dollar against the Euro or other currencies, one will always appear stronger because you are using a relative measure. In reality,  both are being debauched, the one being destroyed at a slower rate will appear stronger. Measuring fiat currencies against one another is like measuring the particles floating in a septic tank. At various times particle “A” will float higher than particle “B,” but so what! We all know what is in a septic tank!

Gold is not in a septic tank. It is an absolute measure that cannot be counterfeited. Its value is reasonably fixed in terms of other real goods. When gold appears to rise in terms of some fiat currency, it means that fiat currency is depreciating. Government does not want you to know this. Hence, when things are not good, break the thermometer that we call gold or remove the canary from the coal mine.

2. Cutting Off An Escape

A related event of importance, which I believe has not received enough attention, is the Cyprus bank “bail-in.” Telegraphing to Europe and the rest of the world the fact that deposits in banks are no longer safe was a government act of idiocy. For those who believe government is terminally stupid, Cyprus was an act which exceeded even these low expectations.

Actions regarding the confiscation of assets (retirement accounts, pensions and other wealth) are routinely discussed by those who know there is no way out of this mess. The actions in Cypress validated these ideas to a large portion of the masses who otherwise believed such talk to be “kook-babble.” Cyprus demonstrated government’s willingness to do anything to survive. It telegraphed the danger to non-believers.

Gold is a natural escape for storing wealth. It has been for thousands of years. It cannot be debauched like fiat currency, and it is easy to hide or transport. In short, it is the perfect money (and this is why government always tries to discredit it).

The reason to flee banks was established. Once that cat was out of the bag, it was necessary to destroy the key means of escape — gold. Not attacking gold ran the risks of bank runs and wealth disappearing from government control.

I do not believe that Cyprus and the signal it sent to citizens around the world can be overstated. It revealed the true nature of government and the danger that we all face.

3. The Dishonesty in the Gold Markets

The amounts of gold claimed to be held by various financial intermediaries, including the US Federal Reserve and perhaps Fort Knox, seem to be fallacious. There has been no public, physical audit of these stocks for many decades. Rumors have been circulating for years that the Fed has leased out its gold to bullion banks, who then have sold it into the marketplace partly as an effort to depress gold prices.

Sovereign countries store a lot of their physical gold in the US. Recently, Germany requested a return of their physical gold, a process that should take about a week to accomplish. Germany was told that it would receive its gold over a period of seven years! Does that make you wonder whether the gold is actually where our authorities say it is?

If the gold was leased and then sold into the marketplace by bullion banks, then these banks have to buy it back to be able to return it. Most of this gold was sold at much lower prices than today, making it virtually impossible to buy it back without bankrupting many of these institutions. Similarly, rumors of massive short positions in gold by large investment banks suggest further bankruptcies or financial hardships should this gold have to be delivered.

All of these political problems are lessened when the price of gold falls.

Did Government Shoot Itself in the Foot?

The reaction to the gold take-down has been rather remarkable. The manipulation of the paper market in gold has created enormous demand in the physical markets. Gold dealers have seen runs on their inventory by customers. Many have trouble keeping gold in stock. Michael Snyder reports:

The crash of the price of paper gold on Monday has unleashed an unprecedented global frenzy to buy physical gold and silver.  All over the planet, people are recognizing that this is a unique opportunity to be able to acquire large amounts of gold and silver at a bargain price.  So precious metals dealers now find themselves being overwhelmed with orders in the United States, in Canada, in Europe and over in Asia.

Will this massive run on physical gold and silver soon lead to widespread shortages of those metals?  Instead of frightening people away from gold and silver, the takedown of paper gold seems to have had just the opposite effect.  People just can’t seem to get enough physical gold and silver right now.  Those that wish that they had gotten into gold when it was less than $1400 an ounce are able to do so now, and it is absolutely insane that silver is sitting at about $23 an ounce.  If the big banks continue to play games with the price of gold, we are going to see existing supplies of physical gold and silver dry up very quickly.

And once reports of physical shortages of gold and silver become widespread, it is going to absolutely rock the financial world.  But this is what happens when you manipulate free markets – it often has unintended consequences far beyond anything that you ever imagined.

It seems that government’s attempt to discredit gold has served to awaken the awareness of gold’s value as a protection against predatory government and an economic future unlike anything we have seen before.

Jim Sinclair summarizes my feelings with two quotes from a recent email:

“Nothing will unnerve the paper gold shorts more quickly and do more to undercut their confidence than to strip them of the real metal and force them to come up with more hard gold bullion to make good on deliveries. “Stand and Deliver or Go Home” should be the rallying cry of the gold longs to the paper gold shorts.” –Trader Dan Norcini

QE to Infinity, followed by Gold balancing the balance sheets of the sovereign balance sheet disasters. Just as there is no tool other than QE to feign financial solvency, there is no tool to balance the balance sheet of the offending entities other than Gold. It is just that simple. –Jim Sinclair

Nothing is simple in investing or trading. Matters are especially more complicated when markets are no longer dominated by economics but by interventions. The closest thing to a sure thing (and there are none) was gold, given the bankruptcy of sovereigns around the world. That sureness played out as gold rose from $250 per ounce to a high of $1,900 in the space of eleven years. Whether it was ever a sure thing is irrelevant. It is a better thing today than it was two weeks ago. Nothing has changed except that it is cheaper.

It will be a bumpy ride and one with institutional ambushes along the way. But it may be the only vehicle that can get you through the chaos ahead. A friend of mine (NII), summarizes your choice quite succinctly:

So who do you trust; a 5,000 year history of GOLD persevering over fiat currencies in preserving value or a handful of MIT academics controlling some of the largest Central Banks in the world openly admitting they are experimenting with your currencies/savings? The game is far from over as to who or what determines the price of GOLD.

 

Gold After The Crash

gold obamaFor those wanting (needing?) to read another analysis of the gold price debacle, here Grant Williams provides a good explanation. There are several reasons which might have prompted this engineered attempt at driving down the gold price. If one of those reasons was to scare the public away from gold as a safe asset and a store of value, it appears to have been a failure. Physical demand, at least among the public, is higher than before the crash.

Jim Wyckoff confirms what many others have reported:

Strong demand for physical gold worldwide, and especially from Asia, continues to underpin the gold market. Reports this week have said there are shortages of gold bars and coins in some countries, with gold retailers jacking up their charged premiums over the spot price of gold.

The public, speaking with their purses, seem to have a better understanding of what is happening than governments expected. That is good for the public, but bad for the criminal class that is trying to dupe them. Mr. Williams provides some amazing pictures of what appears to be a gold buying panic.

For those wanting a comprehensive analysis of the gold industry from both a supply and demand standpoint, here is a good resource.

Will there be other raids against gold? Probably, but future ones are apt to not be as dramatic. Is this a time to be buying gold? Time will tell, but it is about $200 less per ounce than it was a couple of weeks ago.

Because I believe that gold should be a part of every investor’s portfolio, this drop provides those who have none or are underweighted to acquire some at what may appear to be bargain prices down the road. Consult your financial adviser before making any financial decisions.

Page 2 of 410:« 1 2 3 4 5 »Last »