Political Metals

By Alasdair Macleod | GoldMoney

Gold, politics, and Venezuela

Markets were abuzz last week with Chavez’s recall of Venezuela’s gold reserves not currently held in Caracas. Bulls are excited by the thought that withdrawing some 150-200 tonnes from the Bank of England and the bullion banks will force a bear squeeze on the LBMA, where gearing between the physical and paper markets are assumed to be 100 to 1. This stretches the relationship between paper gold and physical gold even further. They are also excited by the possibility that others might follow Venezuela’s example.

These concerns are real and should not be dismissed lightly, and the announcement could not have come at a worse time for LBMA members, who also face being caught up in a European banking crisis. Fear dominates, but the real trigger for this market emotion, and therefore its outcome, is global politics. Chavez is not just recalling his country’s gold to protect its integrity, he is waging an idealist’s war against the capitalist system and the US in particular. This is why he has threatened to move gold and foreign reserves to the countries he says he trusts, principally Russia and China, and why he is proposing to nationalise Venezuela’s gold mines.

He has picked the capitalist system’s weakest point. He has been told by his central bank that the Fed, the BoE and the Bank for International Settlements hold gold for the whole central banking community in the main trading centres, and that much of this gold exists only as a ledger entry and is not backed by physical metal. Whether or not Venezuela’s gold is held in these fractionally-backed sight accounts, or in earmarked accounts where the gold is held separately, we do not actually know; but there is little doubt that this move is designed to encourage other central banks to demand that their gold is also repatriated.

Chavez has a point. It is a fair bet that the International Monetary Fund’s 2009 sales of 212 tonnes of gold to other central banks are held in sight accounts as a condition of sale. India, Mauritius and Sri Lanka, who bought this gold, must be very nervous. Interestingly, India and Sri Lanka are also associated with the Shanghai Cooperation Organisation, which was set up by China and Russia with the eventual goal of establishing an Asian supranational state.

This little-known connection is extremely important. The SCO even has a website. The central banks of its member states, observer states and dialogue partners are nearly all buying gold, overtly or covertly. This is more likely to be a co-ordinated economic attack on the West than just a purely random event.

Until Chavez’s intervention, China and Russia – who run the SCO – were gently turning the screws on the gold market: Russia by announcing regular purchases and China by encouraging its citizens to buy. They appear to have put the word about through the SCO that gold will have an important role in the SCO’s future, and those involved should have some. This is a world Chavez wants to be part of, and by removing his country’s gold from capitalist markets he is declaring his credentials.

Underlying this extreme socialist action is the Marxist belief that capitalism will destroy itself. Chavez believes it is his duty to give it a helping hand.

Related Articles:

• Bullion Bank Run – Pressure from the Top and Bottom
• Precious Metals Price Discovery about to Change

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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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One Seven Six Four
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Jim Sinclair commented that when gold breaches $1764, it signals the start of Phase 3 of the bull market and the price is expected to go exponential. Gold was around $1660 when the interview was recoded on 5th August 2010 at the GATA conference in London.

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The $1764 Gold battle line has been drawn, and for the past 24 hours, gold has been repeatedly testing that level for the first time.

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Looks like we’ll know soon enough if gold will close above this critical number.

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Updated: 11 Aug 2011

Gold indeed closed above that $1764 battle line number last night:

So, if Sinclair is right on this call, as he has often been in the past, expect gold to print some interesting numbers on the charts going forward into phase 3 of the gold bull market. According to James Turk, gold went into Phase 2 when it crossed $1000 around November 2009.

After leading gold since Aug 2010 when the Gold/Silver ratio (GSR) was around 65 until the May 1 cartel-orchestrated price take-down (GSR at 32), silver has been playing catching up lately. 18 minutes into this interview with Eric Sprott, James Turk, founder of GoldMoney commented that he believes silver is still in Phase 1 and will not enter Phase 2 until it crosses $50 (its 1980 high). If you think you’re a little late in gold and feeling nervous about jumping into the bandwagon around it’s all time nominal high, silver may offer an easier entry point. But as most hard currency adherents would advise, have a healthy ratio between both monetary metals.

Notwithstanding the euphoria of breaking through the much watched “$1764 Gold” number, extreme volatility in both directions for both PMs is to be expected. Gene Arensberg, in his latest Got Gold Report commented that the Large Commercial Net Short (LCNS) position is near its all time high but he can’t predict whether these BIG Commercial short sellers will push gold and silver back down or get overrun this time. If it’s the former, we’ll see another take down. If the latter, the short covering and new buying arising from the flight to safety crowd will cause Sinclair’s forecast to be cast in gold!

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Updated: 12 Aug 2011

Comex gold closes $66/oz off record high as stocks rise, CME increases margins

-Updated August 12

In the “About” page, I listed 5 points forming the theme of this website, which was set up to share my personal experience in discovering that the debt-based financial world as we know it today is one gigantic Ponzi scheme. That it was designed to work against people who’ve expended labour to earn in excess of what they needed, saving that surplus for a time in the future when they could no longer exchange labour for the daily necessities of life.

The first of my 5 points was Do not invest in gold or silver. Own them in place of Fiat Money. 

Distinguishing between investing and owning gold (or silver) goes beyond semantics. It lies at the core of why so many are still reluctant to make gold or silver a part of their asset portfolio despite the financial turmoil and uncertainties surrounding them. Owning gold is not meant to make you richer. It protects you from getting poorer due to rising inflation.  It preserves what you already have - performing that critical function of money (Store of Value) better than any other forms of money available today.

The idea of not investing in gold is not my original idea. It’s a concept I learnt from many who’s been in this space long before I discovered that gold is money. The recent presentation given by James Turk, founder of GoldMoney, at the 2011 Munich DEG conference on 29th April 2011 explains this concept very eloquently.

Also reproduced below are some charts appearing in the video for your easy reference. (They were from a previous presentation made a few months earlier)

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Q&A after the presentation

In recent times, major institutions are running to the EXIT. The most famous of which was how The University of Texas Investment Management Company took delivery of almost $1 billion in gold bullion, and that’s because

“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” Bass said today in a telephone interview. “I look at gold as just another currency that they can’t print any more of”.

Groups of nations are running to the EXIT. I highlighted one of the more significant runs in this post Another new writing on the wall - BRICS dump the USD.

Brazil, Russia, India, China and South Africa – the BRICS group of fastest growing economies – Thursday signed an agreement to use their own currencies instead of the predominant US dollar in issuing credit or grants to each other.

Yesterday, it was reported that Mexico saw smoke coming from her northern neighbour and headed for the exit, big time! Considering how many other nations (China, Russia, Thailand, Belarus, Bangladesh, Venezuela, Tajikistan, Ukraine, Jordan, Philippines, South Africa, Sri Lanka, Germany, Kazakhstan, Mexico, Greece, Pakistan, Belgium, Czech Republic, Mauritius and Malta) have been running towards the exit since 2009, Mexico’s Central Bank wasted no time to catch up, as illustrated by this very pretty chart.

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MEXICO CITY, May 4 (Reuters) - Mexico massively ramped up its gold reserves in the first quarter of this year, buying over $4 billion of bullion as emerging economies move away from the ailing U.S. dollar, which has dipped to 2-1/2-year lows.

The third biggest one-off purchase of gold by any country over the past decade took Mexico’s reserves to 100.15 tonnes - or 3.22 million ounces - by the end of March from just 6.84 tonnes at the end of January, according to the International Monetary Fund and Mexico’s central bank.

…… Credit Suisse precious metals analyst Tom Kendall said it was worthy of note that Mexico, whose economy is very closely tied to the United States, had taken this step.

“The size (of the purchase) is certainly pretty chunky to have been accomplished in that space of time. So it certainly gives another sizable layer of support to gold’s position in the international reserves system,” he added.

George Milling-Stanley, managing director of government affairs at the World Gold Council industry group, said Mexico was following a recent trend among central banks to restore a “prior balance between gold and currency reserves.”

“This is further supported by the fact that the May IMF numbers show continued buying by Russia and Thailand of 18.8 tonnes and 9.3 tonnes respectively,” he added.

Mexico’s reserves rank it 33rd among the top official holders of gold. The United States is the largest official holder of gold, with 8,133 tonnes, which account for 73.8 percent of its total international reserves.

China is the sixth largest holder of gold, with 1,054.1 tonnes, or just 1.6 percent of total reserves, while eighth-ranked Russia now has some 811 tonnes of gold, up from 788.78 in January, according to the IMF data.

Silver, which hit a record price earlier this year, may also have been on Mexico’s buying list, said Martin at HSBC.

Premier Wen Jiabao shakes hands with his Russian counterpart Vladimir Putin

Going back to November last year, recall how China Daily reported that

“China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.”

Well, just as Mexico was reported playing catching up yesterday, Japan and South Korea did not want to be left behind in the multi-lateral Dump USD game either. WSJ reported:

May 3, HANOI—Finance ministers from China, Japan and South Korea said in a joint statement Wednesday they have agreed to start studying the use of their own currencies in trade settlement, the latest sign of Asian efforts to reduce dependence on the U.S. dollar.

The ministers from the three big Asian economies also said they are “mindful of” challenges such as growing inflationary pressures in Asia, rising global commodity prices and increasingly volatile capital flows into the region.

Blocks of Nations, individual nations, institutions, and individuals are all heading to the EXIT sign or have already exited the world reserve [paper] currency. They are doing so because the writing is already on the wall. The “Waterfall Decline” event that James Turk, founder of GoldMoney predicts seems to be approaching fast. They exit because they’ve lost confidence in the once almighty USD.

But, if the exit is into monetary metals gold and silver, why are we witnessing the sudden “Waterfall Decline” in the monetary metals instead of the USD? The only sane way to look at this insane price action is to understand that they are Political Metals whose prices are being manipulated by political powers through their Gold and Banking Cartels. The best way to exit your paper currency is to hold gold and silver, not invest in them. View them as owning another currency rather than buying them as an investment.

Related Reads:

• Silver might crash?
• COMEX and London Bullion Market Exchange are at heightened risk of default
• Fluctuations and Trends In the Comex Silver Inventory
• Gold Manipulation
• Silver Manipulation
• and many other articles throughout this site and blog