Political Metals

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It scares me!

Gold punched through $1,900 today. If the current financial system can withstand the stress and remained intact till the day gold trades at $20,000 an ounce, what will life be like then?

If we’re holding gold at that time, we may be doing fine but we are not likely to be 10 times richer. That’s because nothing much has happened to our gold. Rather, paper currencies would have lost so much purchasing power that it would take 10 times more of the same to buy what we could buy today. A Big Mac will most likely cost around $43 in the US. In Malaysia, NZ and Britain, it’ll like be  around RM76, NZ$54 and £25 respectively (estimates based on Big Mac Index). When a basic meal costs that much, life can be very tough for savers who continued holding on to their paper currencies or other paper assets.

Many of my friends and relatives, from retired professionals to missionaries have been ill advised to rely on supposedly safe or high yielding investments like mutual funds, government managed pension schemes, term deposits or hot stocks to generate passive income or preserve the value of their retirement funds. Despite being presented with information from this website and elsewhere, there’s little affinity shown towards gold or silver. This scares me and for their sake, I hope gold does not get anywhere close to $20,000 before they get on board.

What’s even scarier is the fact that an enormously huge segment of society do not have the means to get on board, even if they wanted to. We’re looking at the 1.4 billion people living on less than NZ$2.25 a day. That’s less than 0.05 ounces of silver! They worry not about the Fed nor the Cartel but about how to provide food, clothing, housing and healthcare with that amount each day. It’s about survival, not savings. Pause for a moment to imagine their plight when gold hits $20,000.  Spare them a thought today, and check out their appeal for assistance.

Why $20,000 gold?

In this recently released documentary, Mike Maloney presents the case for $20,000 gold by stepping back and looking at the big picture. He takes us back, very far back, and paints us a very big picture. This excellent educational video is a must watch, especially if you’re new to the Political Metals space. It’ll be your 90 minutes well spent.

But if you can’t spare the time, I’ve highlighted some of his key points with some new charts below for a quick read.

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Dow/Gold Ratio Chart: Where are we in the Wealth Cycle? 

Using the Dow Jones Industrial Average (Dow) as a measure of performance of the equities market in general, the ratio of the Dow to the price of gold indicates the performance of equities market relative to gold. Currently each point of the Dow is worth about 6oz of gold. During the process of correction after the biggest stock market bubble in history, the ratio is expected to head towards the historical mean (4oz) and overshoot it before finding its fair value again.

The bigger the bubble (deviation from mean), the larger the overshoot. During the present cycle, Mike expects the overshoot to touch 0.5:1 (1 oz of gold worth 2 points of Dow). In its extreme, the Dow would have to collapse from 11,000 to 950 if the price of gold remains at current level of $1,900. Conversely, gold will increase to $22,000 if the Dow remains at current levels.

Relative performance of Dow Vs Gold & Silver since Jan 2000
(Worst reference point, at peak of stock market bubble)

Relative performance of Dow Vs Gold & Silver since March 2009
(Best reference point, at the start of QE1)

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Currency Supply Chart: Where are we in the Inflation/Deflation Cycle?

For simplicity, “money” & “currency” are used interchangeably here. Watch the video to see the difference.

Monetary inflation is the increase in money supply resulting in price inflation (rising prices of goods & services), with a time lag between the former and the latter. The reverse applies to monetary deflation and price deflation. Studying the trend in money supply or the total amount of currency in circulation (CinC) over a period of time gives us an idea of where we are and where we’re heading in terms of inflation and deflation.

Money is created in two stages. The initial Base Money is created by the Fed (or other central banks). More new money is then created (up to 9 times the initial Base Money) within the private banking system through credit. It is loaned into existence. Watch the video to learn more about the money creation process.

The chart above  represents the amount of CinC that’s exclusively created by the private banking system. The highlighted area indicates that this component of the overall money supply has dropped by $1.7T since the 2008 crisis. This is the Debt Collapse or Credit Contraction. Less lending by banks results in less money chasing goods and services, leading to price & asset deflation. It is evident from the chart that a contraction of this magnitude has never happened since 1960. The last time it happened was just before the Great Depression of the 1930s.

In response to this credit contraction, and in an attempt to prevent another Great Depression, the Fed has been rapidly increasing the Base Money supply by creating new money. The recent rate of increase is unprecedented. The first trillion dollars was created over a period of about 90 years. The next $1.4T came into existence over the last 2 years!

This rapid increase in Base Money (red chart) was an attempt to offset the decrease in the credit money (blue chart). When we add these two components of money supply together, we obtain the total CinC (Base Money plus Credit Money) as shown in the chart below.

Notice the contraction at the top of the chart, albeit a smaller one. It is evident that despite the frantic pace of money printing by the Fed, it has not succeeded in offsetting the reduction in money supply due to credit contraction.

The Fed has little choice but to continue creating money.  With such a large perturbation in total currency supply and due to the complexity and size of the monetary system, it is not possible for the Fed or anyone else to create just sufficient money at just the right rate such that the total CinC won’t overshoot its long term trend. The principle that the larger the deviation from the mean, the larger will be the overshoot during the correction applies here as in the stock market above. The fact that there’s an undetermined time lag, between monetary inflation and price inflation further adds to the likelihood that the next round of money printing will result in a massive overshoot. Coupled with other factors, hyperinflation could be just round the corner.

In his book, Rich Dad’s Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future, and again in his presentation, Mike predicted the following sequence of events:-

1. Threat of deflation - At the onset of the 2008 crisis (Past)
2. Money printing - TARP, QE1, QE2 (Past & more to come)
3. Big inflation - Here and now (anyone disagree?)
4. Real deflation - Asset deflation in real estate & stock market (The severe but short deflation  is ahead)
5. Hyperinflation - Just round the corner?

How does gold perform under inflation and deflation environment? Check out the study by Oxford Economics: “Impact of inflation and deflation on the case for gold”.

Related Resources:

• Fractional Reserve Banking - Two short video clips on money creation
• Crash Course on Banking, Finance & Economy. By Chris Martenson
• Central Banking and the Federal Reserve System (Fed)

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The largest physical movement of gold in recent history is under way.

Hugo Chavez, Venezuela’s President wants to move his country’s 211 tonnes of gold (over $12B at Friday’s close) currently stored in American & European banks back to Caracas.

Major upward moves in gold prices over the past couple of years have been tied to central banks’ activities in the gold market, like the big purchases by India, China & Russia.

However, this recent move by Venezuela is rather unique. Instead than buying more gold, Venezuala merely wants to repatriate what is already hers. Unlike central bank purchases, which could involve just a ledger entry, this is the real thing. Physical gold is being moved around. What’s more significant is the discovery that after accounting for the 99 tonnes and 11.2 tonnes being held at the Bank of England (BoE) and Bank of International Settlements (BIS) respectively, about half of this huge stash are held in bullion banks like JP Morgan Chase et al - all major gold shorts. The move has left them scrambling for the real stuff.

This has led many to believe that the “Golden Retrieval” may have been a contributing factor to the most recent spike in gold price. It hits at the core of what GATA has been highlighting for over a decade - that bullion banks have been working hand in glove with central banks to suppress the price of gold, and that much of the physical gold at bullion banks and central banks are encumbered, leased or sold many times over, resulting in multiple claims for each bar of physical gold.

Bullion Bank Run - Pressure from all sides

When a major “client” like Venezuala suddenly decides to take physical possession of her gold, it may cause a run on the bullion banks, not unlike the much feared bank run for cash. Bank runs start when depositors begin to lose confidence in the banks holding their cash. All it takes is a a few large depositors withdrawing at the same time, thereby creating the initial stress in the fractional reserve banking system. Soon, the panic hits the masses and long lines form outside the banks.

We have to depend on what the west often refers to as rouge nations - and there are good reasons to believe that there are several out there in a position to take the cue from Venezuala. That’s because it is common practise among central banks to hold their gold outside their countries at ”trading centers” where the bank conducts “its gold activities” - according to a report by GATA citing a comment from Bundesbank. Take a look at this list and see how many potential rouge nation triggers you can spot among the larger holders of gold. As highlighted by Adrian Salbuchi in the video above, there is a political element to Chavez’s radical decision. I can see several rouge nations in that list having similar political motives.

With increasing awareness that the perils of wars, global poverty and social injustice can be attributed in part to our present fraudulent monetary system, there have been many calls to help speed up the inevitable demise of the failed experiment to run a global economy on a debt-based monetary system. All adopt the common strategy of advocating the purchase of physical gold & silver (especially the latter) to protect oneself financially while helping to create stress in the supply of physical bullion to bring down the banking cartel. They include:

• Silver Liberation Army - Buy physical silver coins, bring down JP Morgan & the banksters
• Sons of Liberty Academy - The Silver Bullet And The Silver Shield
• Underground Investor - Smack down the criminal global banking cartel with gold & silver

The set up before us is interesting. While the masses apply pressure from the bottom, we have the deep pocketed boys, institutional investors and money managers primed to move big time money into gold & silver following the recently concluded GATA’s Gold Rush 2011 London conference.  That’s pressure from the middle. Now, with the likes of Venezuala starting to apply pressure from the very top, we may see the tipping point for a bullion bank run soon.

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Updated:

Aug 22, 2011
Libya Down: The link between Libya’s swift regime change, its 144 tonnes of gold & Venezuela’s gold repatriation.

Related Articles:

• Gold Manipulation
• What Big Banks are doing in the commodities market

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This enlightening discussion between James Turk (GoldMoney) and John Embry (Sprott Asset Management) touches on various significant developments in the gold market in recent past. They talked about the S&P downgrade, QE to infinity, hyperinflation, Jim Sinclair’s $1764 inflection point and looking at the value of gold rather than its price.

They concluded that by looking at the past & present central banks’ role and dynamics of Asian demand, physical gold is now taking the lead in price discovery instead of paper gold.

The Gold cartel is losing control and the era of the tail wagging the dog may soon be over!

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After another take down yesterday, gold bounced back to the $1,600 handle and silver above $40 in the Comex Access market today. Gold/Silver ratio dipped briefly below 40.

On the surface, MSM commentators attributed Tuesday’s  sharp 3.7% drop in silver to Obama’s positive announcement about the debt ceiling negotiations.

Behind the scenes however, a more sinister effort to manipulate the silver market was unfolding, as described by BrotherJohnF and Silvergoldsilver below.

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While BrotherJohn thinks that someone sold or “dumped” 50,000 silver contracts (equivalent to 250M ounces of paper silver or $10B worth of physical silver, or in excess of 1 whole year’s of silver production in the US) in one minute, a more probable scenario would be that it was a result of bullion banks’  High Frequency Trading (HFT) algorithms doing their thing to place the price of paper silver anywhere on the chart that suits them and the powers that be at that point in time. Remember that one minute is an eternity in the world of HFT, where transactions happen in the microseconds. Thousands of trading back and forth within or amongst the Cartel members within that 1 minute could produce the cumulative result discussed in that video.

Related reads on HFT

• High Frequency Trading in Commodities
• “Speed”: Speech by CFTC Commissioner Bart Chilton before the HFT World
• Ted Butler’s 5 Questions for Gary Gensler, Chairman of the CFTC
• Silver might crash?

If you don’t mind a little rough language, here’s Silvergoldsilver’s “SLV manipulation July 18th” video capturing the manipulative trades on the SLV ETF before the take down.

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Despite the paper price suppression,  several positive outlooks for PMs were recorded at King World News:

• Sean Boyd - Expect $2,200 to $2,400 Gold & $60 to $75 Silver July 21, 2011
• Hathaway - Gold Breakout & Subsequent Trading Encouraging July 20, 2011
• Peter Schiff - Silver Will Eventually Trade Over $200 July 20, 2011
• Embry - Possible High Triple Digit Silver Before This is Over July 19, 2011
• Turk - Expect a Tidal Wave of Buying & Short Covering in Gold July 19, 2011
• London Trader - Potential for Major Short Covering in Gold July 18, 2011

And finally, it’ll be interesting to see what happens when Hong Kong Mercantile Exchange launches silver futures trading tomorrow.

Understanding the U.S. Federal Reserve System (Fed) is a prerequisite to understanding the role and behaviour of gold and to a lesser extent silver. And to understand the Fed, there’s no better place to start than the book by G. Edward Griffin The Creature From Jekyll Island.

If you’ve read the book or listened to one of his talks following its initial publication in 1974, you’ll be amazed to see the things he wrote about the Fed happening right before your eyes. It’s indeed refreshing to hear directly from the man himself in his recent interview with Sean of SGTReport.

Related Reads

• Central Banking and the Federal Reserve System

On April 26, three trading days before the “drive-by-shooting of silver” resulting in the $6 takedown in 12 minutes, the CME group announced that it had reached record volume the previous day in its COMEX Silver futures, as well as in open interest of its Silver options.

Yesterday, trading of Silver futures reached 319,204 contracts, surpassing the prior record of 201,216 contracts set on November 9, 2010. At the same time, open interest in Silver options reached a new record of 240,344 contracts. The prior record of 235,992 contracts was set on April 21, 2011.

This record volume for Comex Silver futures in April was almost six times the average monthly volume of the last decade. Many attributed this high volume preceding the May 1 silver take-down and the speed & depth of the “crash” itself to High Frequency Trading (HFT) - the robotic execution of trades by powerful computers “capable of buying and selling thousands of different securities in the time it takes you to blink an eye“.

This CBSNews video The Speed Traders gives a rare behind-the-scene insight into the lightning fast but dark world of HFT.

Consider these stunning facts:

• Over 70% of stocks traded in the US are done through HFT robots. No humans are behind these trades because “humans are way too slow to trade on the kinds of opportunities that we’re trying to capture. We’re trying to capture opportunities that exist for only fractions of a second.”
• Their supercomputers are programmed to place and then cancel thousands of orders a second, trying to sniff out which way a market is moving in order to jump in ahead of big rallies and sell off before big declines
• High frequency traders typically tell their computers to make a profit of a penny or less, 40 million times day.
• Speed in accessing raw data from the stock exchange is so critical that these traders rent expensive data center space so that their machines can be physically close to the exchange’s computers.
• Gaining a few milliseconds may make them millions, if not billions a year
• High frequency trading raises no capital for companies, if anything it’s distracting from the capital raising process
• Proponents of HFT say that they benefit the market by providing liquidity, so that when humans or natural traders want to buy or sell, there’s always a counter-party to the trade.
• Others, like William Silver, disagrees…  ”the volume in most issues is vastly inflated by HFT activity, and many computer models being used to acquire and liquidate large positions are built on false liquidity assumptions. This is no problem when markets remain calm. However, once there is a rush for the exits, institutional holders will find that their assumptions on liquidity were incorrect, and we will then experience another mini crash.”
• There are a lot of people out there who think that the stock market is rigged
• “Since we first aired this story, the Securities and Exchange Commission has proposed further reforms, and high frequency traders are now moving into currency and commodity markets“. - CBS News.

And this was exactly what Ted Butler said in his commentary after the May 1 silver price take down.

the record high trading volume and 30% price smash indicate there was little true liquidity present. This is due to a disproportionate share of trading being performed by HFT computer bots. Why are these traders allowed to exist and control so much a share of silver trading?

The ball is in CFTC’s court.

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Related Reads on HFT in commodities, particularly gold & silver

• Ted Butler’s 5 Questions for Gary Gensler, Chairman of the CFTC.
• “Speed” - Speech by Commissioner Bart Chilton before the High Frequency Trading World, USA 2010 Conference, New York, NY
• Silver Might Crash?

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