Topic: Gold and Silver
On Gold and Market Manipulation (3/5) "Gold is Money, and Nothing Else." - JP Morgan before Congress's Pujo Commission, 1913by Jake Towne, the Champion of the Constitution
(libertarian)
Monday, December 8, 2008
In a dynamic duo of articles published this weekend, I predict the fall of the Dollar via a Gold-based perspective, and a US Treasury-based perspective. I want to round off and perhaps even reinforce my theory with a few more opinions and thoughts, which of course may be faulty as the major decisions are still at the mercy and discretion of the FED, whom I have learned to never underestimate. To be a real "expert" in economics today requires one to be an "expert" in predicting government interventions, so it is all guesswork unless one is an insider. I am highly interested if there are any crucial facts I am missing by the way, please leave any counterarguments below.
"I own some gold and if gold goes down I'll buy some more and if gold goes up I'll buy some more. Gold during the course of the bull market, which has several more years to go, will go much higher." – Jim Rogers, famed commodities trader, last week
I have written previously how the FED creates and destroys money, but the example I used of open market operations (OMOs) has changed dramatically in 2008. The FED is on a daily basis still altering its Treasury holdings, but more importantly propping up other assets by buying them, such as mortgage-based securities, Citigroup, AIG, etc. The FED balance sheets has plunged from its historical levels of ~95% Treasury securities to less than 32% Treasuries, which hampers OMOs since the assets purchased will likely find no willing buyer on the market.
It may seem like the FED is creating lots of money (and they are) but remember that $7.76 trillion, $8.5 trillion, WHATEVER the new number will be by the end of this week, pales in comparison to the amount of financial derivatives in existence, which per the BIS at last count (and just over-the-counter!) was $684 trillion. I am not sure if I ever wrote this phrase in this column before, but I’ve always viewed the financial crisis as a "Triple-D" crisis. Dollar. Debt. Derivatives.
There is another method of money destruction that I have not overlooked and want to mention. In an economic "disintegration" or a monster of a recession, money can also be destroyed by corporate, government and private bankruptcies. In the debt-based world we live in, I think the money destruction could be seen in shocking scales far exceeding the imaginations of the Keynesian-economics-based minds of the FED and other central bankers. For instance, comparatively there has been much less noise in the commercial mortgage markets. However, if a lot of businesses fail, which has been known to happen in any recession, how do you suppose those mortgages will be repaid to the banks? In such a scenario, central bankers have just two options; create replacement money to re-inflate supply or revalue the currency to an asset (very likely gold, after all central bankers do not hold at least some gold for their collective health, the yellow stuff is nice life insurance for fiat currency, ain't it?).
In this eye-popping December 4 essay by James Conrad, he reasons the central bankers will revalue to some sort of a gold standard to escape oblivion, and the price of gold will go from $750 per ounce to $7500-9000. [Remember the "price" is not REALLY going up, after all 1 ounce of gold is the same from day to day, what it really means that all fiat currencies are going to be massively devalued as the worthless scraps of paper and electrons they really are!]
"There is a legal requirement that, in every futures contract that promises to deliver a physical commodity, the short seller must be 90% covered by either a stockpile of the commodity or appropriate forward contracts with primary producers… Things, however, are changing fast. As previously stated, the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest. Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts."
Time for Captain Calculator! On December 5, the open interest was 264,796 contracts (at 100 troy ounces per bar.) This equates to 823 tonnes, a very significant amount equal to about 10% of the total gold reserves claimed by the United States, the world’s largest holder. There are 26.5 million ounces in contracts and only 2.9 million ounces in COMEX warehouses to cover deliveries as Dr. Fekete notes here. Over 40% of the warehouse totals will be delivered before January 1. Where is the gold to cover the rest of the contracts? In the ground? In central bank vaults? At the GLD London vault? I do not know the answer, but I agree with Fekete’s comment on gold’s recent backwardation and Conrad, the traders requesting delivery are skeptical there is enough.
Conrad then proceeds to outline a very convincing (to me) proof that ends with:
"It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers.
Revaluation of gold, and a return to the gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc., while the appearance of an increased number of currency units will stimulate investor psychology, and lending and economic output will increase, all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics."
Jim Sinclair, precious metals expert, comments here:
"I recently completed the same mathematics that helped me so much in 1980 to determine the price that would be required to balance the international balance sheet of the US.
Balancing the international balance sheet is gold’s mission in times of crisis.
I recently did the math again and was sadly shocked to see what the price of gold would have to be to balance the international balance sheet of the USA today. That price for gold is more than twice Alf’s projected maximum gold price."
Alf Field’s maximum projection is $6,000 per troy ounce. Wow, guess Captain Calculator can take a vacation! On that note I would like to end with a reminder to the republican, Republican, and the third person who is reading this:
"We renew our allegiance to the principle of the gold standard and declare our confidence in the wisdom of the legislation of the Fifty-sixth Congress, by which the parity of all our money and the stability of our currency upon a gold basis has been secured."
– Republican National Platform, 1900
"We believe it to be the duty of the Republican Party to uphold the gold standard and the integrity and value of our national currency."
– Republican National Platform, 1904
"The Republican Party established and will continue to uphold the gold standard and will oppose any measure, which will undermine the government’s credit or impair the integrity of our national currency. Relief by currency inflation is unsound and dishonest in results."
– Republican National Platform, 1932 [Above are sourced from H.L. Mencken, A New Dictionary of Quotations on Historical Principles from Ancient and Modern Sources (1985, p. 471)
"We must make military medicine the gold standard for advances in prosthetics and the treatment of trauma and eye injuries."
– the only mention of gold in the Republican National Platform, 2008. Try searching for ‘gold’ or ‘dollar’ here.
Well, the Gold Standard ended in the US in 1914 when the first unbacked and "unsound" Federal Reserve Notes were printed. Ok, I hate the FED, but fellow columnist Gene DeNardo phrased it best in his intriguing article "MV=PT A Classic Equation and Monetary Policy":
"When the economy grows in a healthy way, we all share in the profit as our currency becomes stronger and is able to purchase more."
"... A thousand lies, And a good disguise. Hit ‘em right between the eyes! Hit ‘em right between the eyes! When you walk away, Nothing more to say. See the lightning in your eyes! See‘em running for their lives!
Now dance, f***er, dance! He never had a chance!"
- Offspring, "You're Going to Go Far, Kid" Note the silver and gold coins in this music video. The corporatocracy tried to wipe our minds, but thanks to Scrooge McDuck we haven't completely forgot the 'eternal wealth' of the Chinese and Indians, of all free people on the planet
"Now I don’t know, and it’s hard to explain, But it seems like things are just kind of insane. Because the world is crying, But nobody’s listening! So please leave a message on my cell phone!...
I don’t know much! I don’t know too much! But I know this! S**t is f***ked up!
I guess it’s all about the dream! The ends justify the means! You know it’s all about the dream! The ends justify the means! "
America, Were Michael Phelps' Eight Olympic Gold Medals Worth Winning? Published: August 24, 2008 Michael Phelps and other American athletes are bringing back loads of Gold, Silver, and Bronze Medals from the Beijing Olympics. A young libertarian economist asks if it was worth it.
The Money Matrix - Prelude (PART 1/15) Published: August 1, 2008 Prelude and Source List to a Series on Global Monetary Policy of Control and Explaining Big Government's Finances
The Money Matrix - What the Heck Are Derivatives? (PART 10/15) Published: December 9, 2008 This article seeks to define financial derivatives and why they are so important. Future and spot market basics are also examined so the Reader understands how the price of gold and silver is determined.
Save Ron Paul's Voice - A Money Matrix Addendum Published: September 28, 2008 Learn how by reading. Article is intended as a poke-in-the-eye for members of the Ron Paul Revolution who complain about the bailouts and the financial, banking, and housing crises and do not realize that they may in fact be hypocrites.
MY PROPHECY - The Federal Reserve Will End! A Money Matrix Addendum Published: October 29, 2008 Many of the Prophecies of Ferdinand Lips from 2005 are becoming true. "Right now [the FED] is creating the biggest housing bubble in history. This may lead to economic collapse. I expect that a revolution will one day take place against the Fed. It must be abolished. After all, its founders were not that intelligent but rather stupid men. Or they were devils. It is a tragedy. Not only that: It is the biggest tragedy in world history, even worse than wars. Yes, worse than wars. It made most people poor. It damaged America. It caused wars and then helped to finance them."
The Next Bubble to Pop! Published: December 7, 2008 "These days, I am more concerned with the return OF my capital, not the return ON my capital." - attributed to Mark Twain
Fellow Nolan Chart columnist Republicae really has a wealth of experience on honest money and government control far exceeding my own, and is one of my favorite authors here at the Chart. Here are a few articles to take a look at:
GO GATA! The premise of the Gold Anti-Trust Action Committee that the world gold market is artificially suppressed by central banks in order to make their currencies look stronger.
www.GoldMoney.com - GoldMoney is an international gold and silver warehouse with insured vaults in London and Zurich. Ability to hold and pay interest on four major fiat currencies, issue payments in goldgrams, etc. Think of them as an alternative way to diversify where and how your physical metal is stored, but I urge you to be wary and thoroughly investigate this and ANY method where someone else holds your metal for you before investing. The best is always physical possession (or pay for storage at a Brinks-type depository) although you should always be creative with your storage locations :)
The World Gold Council - A wealth of information on central bank holding, gold derivatives, supply and demand statistics and more. Free login required.
www.jsmineset.com Expert Jim Sinclair shares his thoughts on gold investing, financial markets, and trading. For free!
www.DollarCollapse.com This site's main use is as a newsfeed for dollar, gold, and housing market current events. They explain their dollar collapse theory here, which I partly agree with.
www.SilverSeek.com I particularly enjoy reading the columns of Theodore Butler and Jason Hommel
www.GoldSeek.com The sister site of SilverSeek. The Mogambu Guru's (aka Richard Daughty) column has tunnel vision but hilarious and educational..
www.lemetropolecafe.com Offers timely gold market advice and a daily "Midas" column. Try the 2-week free trial.
Paul, Ron. "Pillars of Prosperity." (2008) A 400+ page compilation of Dr. Paul's writings. After reading these, one realizes that Dr. Paul did very little recent work in putting together his best-selling "The Revolution" as most of this book was written 20+ years ago.
Will Joey Biden Be President? THE BARACK OBAMA BIRTH SAGA CONTINUES Published: December 7, 2008 When I first started writing on the constitutional eligibility of both Barack Obama and John McCain after the conventions, I thought the issue would be quickly silenced. Forgive my chuckling and a cheer as the forces of the Constitution continue their valiant charge for that "damn piece of paper."
The Next Bubble to Pop! Published: December 7, 2008 "These days, I am more concerned with the return OF my capital, not the return ON my capital." - attributed to Mark Twain
SPOOF: New Element Discovered in America! Published: December 5, 2008 The heaviest element ever was discovered yesterday by Franklin Delano Mussolini Laboratories of Washington, DC. Read all about it!
Words of Advice for the next Secretary of State Published: December 3, 2008 President-elect Barack Obama recently announced his pick for SecState: Senator Hillary Clinton. Here is some advice for her, from a former Secretary of State by the name of John Quincy Adams.
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article are those of Jake Towne, the Champion of the Constitution only and do not represent
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Posted By: Jake, the champion of the constitution
Date: 2008-12-11 02:09:10
had a few questions from a reader i wanted to post here:
"Basically, I don't understand how a ten-fold price increase in the gold price doesn't also cause other commodities to go up. Won't holders of gold sell to take profits, and look to put those profits in other investments? Perhaps gold will outstrip other investments by so much that holders will be afraid to get off the rocket, but once the price does look like it peaks, won't these new mega-rich masters of the universe cash in and start building sky-scrapers and creating new bubbles?"
- yes, very important note you made here. Gold will equilibrate at some new worth relative to oil, national currencies, corn etc. if you buy the "story" that it is suppressed on purpose. So at first gold-owners should make a "profit" in dollar-based terms until gold stabilizes, and I dont pretend to know what that level is, although 15:1 oil barrel:oz gold, or 1 1964 90% silver dime buying a good loaf of bread is a good of guess as any.
So I think you are absolutely right, the cost (in dollars) of other commodities WILL ALSO GO UP! Hopefully, this is the end of the charade game for government-issed crappy paper money. BUT the value of say a barrel of oil, bushel of wheat will stabilize in terms of goldgrams (that is if all this is allowed by gov'ts, otherwise this = continued pain) - although supply/demand economics will still cause it to vary - new supplies of gold are fairly low and controllable but perishable commodities/consumables like oil especially will always fluctuate of course. So for the gold owners at the very least your purchasing power will stay constant, while those of those without the metal will fall - perhaps disastrously so. The wildcards are - what will the gov't do to interfere? and when? when? when? I certainly don't pretend to have the answer to these, just guesses.
A great book I recently finished on this is Gold Wars by Swiss banker Ferdinand Lips in 2001. He is dead now, but was an honest money and historian, actually worked for Rothschild's for many years.
"Is the whole scenario described in Conrad's article just a way to buy five years or so before massive dollar devaluation spreads from gold to investments to consumption goods?"
You won't like my answer here, but maybe. I'm not really sure, but I am thinking about it. Regardless of his thoughts though, a massive New Deal style bailout/stimulus by Obama will lead to a depression for sure. Stimulated spending that will eventually screw our children, but postpone a few years.
I can even tell you how I think it will all end, which is the true reason I've thrown myself into studying economics every night for the 8 months or so - and then decided i am probably right - a colossal world war that will cause misery beyond belief.
Posted By: Paul Benedict
Date: 2009-03-27 14:36:35
Wow... perhaps you were early. The noise from China and the "slip" by Geithner on a new currency being an interesting idea... Not chance? Trial baloons?
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"I own some gold and if gold goes down I'll buy some more and if gold goes up I'll buy some more. Gold during the course of the bull market, which has several more years to go, will go much higher." –