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From Canada to NZ, and everywhere in between, people are waking up!

June 4, 2012 Leave a comment

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From Canada to NZ, and everywhere in between, people are waking up! Waking up to the fact that the existing global monetary & banking system is seriously flawed. Many would even go as far as saying it is a fraud. Unless governments the world over change the way national currencies are created and managed, it is a mathematical certainty the system will collapse like a house of cards. Here’s a small collection of voices explaining the flawed or fraudulent system together with their calls for change and your personal action.

Canada: Victoria Grant, a 12-year-old Canadian spoke at the inaugural Annual Public Banking Conference in Philadelphia, April 27&28 2012. She called for monetary reform and her contention was that governments, not banks, should create and lend a nation’s money. Why should governments borrow money from private bankers and pay compounding interest on the debt when that money never existed in the first place, but was created out of thin air by the bankers. Watch Victoria’s interview on RTamerica.
New Zealand: PositiveMoneyNZ is a campaign to move NZ from a debt-based economy to one that operates with a full reserve in which money has been issued debt-free and interest-free. A draft bill “Reserve Bank of New Zealand (Creation of Currency) Bill” has been crafted to get the initiative going. Watch this short video explaining the problems behind the existing monetary system, how YOU have been affected and why a total change is required.
UK: We now have a Debt Crisis because almost every pound we need in our economy must first be borrowed by us from a high street bank, and banks don’t need to have any real money before it can make a loan to someone. To end this crisis, stop banks from creating new money and let the government, through the Bank of England, create debt-free money instead. PositiveMoneyUK, formed in March 2010 is campaigning against the deep flaws in our current monetary system.
USA: Congressman Ron Paul, the champion of small government and sound money (gold & silver) is at the forefront of the campaign to “Audit the Fed” and to “End the Fed”. Going by the enormous crowdsall along his campaign trail, Americans have finally awoken to the truth behind Thomas Jefferson’s famous quote “And I sincerely believe, with you, that banking establishments are more dangerous than standing armies…”Watch more “End the Fed” grassroots campaigns.
Congratulations for coming so far down the page! Relax and reward yourself with this final video - Every breath you take, every move you make, we’ll be watching you - Ben Bernanke.

If all this is new to you, it’ll do you good to study the materials in the order they are listed below.

  1. What is Fractional Reserve Banking
  2. Crash Course on Banking, Finance & Economy – By Chris Martenson
  3. Central Banking & the Federal Reserve System
  4. Financial Repression – What is it and how does it silently steal from you
  5. Calm Before the Storm

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Categories: Articles by PoliticalMetals, Commentaries [Video] Tags: , , , , , , , , , , , , , , , , , , ,

If you stop printing, another massive economic crash will occur

May 6, 2012 Leave a comment

Robert Wenzel: Economic Policy Journal

My Speech Delivered at the New York Federal Reserve Bank

At the invitation of the New York Federal Reserve Bank, I spoke and had lunch in the bank’s Liberty Room. Below are my prepared remarks.

Thank you very much for inviting me to speak here at the New York Federal Reserve Bank.

Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.

That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System

My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macro-economy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.

I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality.

Please allow me to begin with methodology, I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that there are no constants in the science of economics similar to those in the  physical sciences.

In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed..

There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.

And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building.

It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did,  again, with intense meetings being held in this very building.

Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.

I also find curious the general belief in the Keynesian model of the economy that somehow results in the belief that demand drives the economy, rather than production. I look out at the world and see iPhones, iPads, microwave ovens, flat screen televisions, which suggest to me that it is production that boosts an economy. Without production of these things and millions of other items, where would we be? Yet, the Keynesians in this room will reply, “But you need demand to buy these products.” And I will reply, “Do you not believe in supply and demand? Do you not believe that products once made will adjust to a market clearing price?”

Further , I will argue that the price of the factors of production will adjust to prices at the consumer level and that thus the markets at all levels will clear. Again do you believe in supply and demand or not?

I scratch my head that somehow most of you on some academic level believe in the theory of supply and demand and how market setting prices result, but yet you deny them in your macro thinking about the economy.

You will argue with me that prices are sticky on the downside, especially labor prices and therefore that you must pump money to get the economy going. And,  I will look on in amazement as your fellow Keynesian brethren in the government create an environment  of sticky non-downward bending wages.

The economist  Robert Murphy reports that President  Herbert Hoover continually pressured businessmen to not lower wages.[1]

He quoted Hoover in a speech delivered to a group of businessmen:

In this country there has been a concerted and determined effort  on the part of government and business… to prevent any reduction in wages.

He then reports that FDR actually outdid Hoover by seeking to “raise wages rates rather than merely put a floor under them.”

I ask you, with presidents actively conducting policies that attempt to defy supply and demand and prop up wages, are you really surprised that wages were sticky downward during the Great Depression?

In present day America, the government focus has changed a bit. In the new focus, the government  attempts much more to prop up the unemployed by extended payments for not working. Is it really a surprise that unemployment is so high when you pay people not to work.? The 2010 Nobel Prize was awarded to economists for their studies which showed that, and I quote from the Nobel press release announcing the award:

One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.[2]

Don’t you think it would make more sense to stop these policies which are a direct factor in causing unemployment, than to add to the mess and devalue the currency by printing more money?

I scratch my head that somehow your conclusions about unemployment are so different than mine  and that you call for the printing of money to boost “demand”. A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%.

I also must scratch my head at the view that the Federal Reserve should maintain a stable price level. What is wrong with having falling prices across the economy, like we now have in the computer sector, the flat screen television sector and the cell phone sector? Why, I ask, do you want stable prices? And, oh by the way, how’s that stable price thing going for you here at the Fed?

Since the start of the Fed, prices have increased at the consumer level by 2,241% [3]. that’s not me misspeaking, I will repeat, since the start of the Fed, prices have increased at the consumer level by 2,241%.

So you then might tell me that stable prices are only a secondary goal of the Federal Reserve and that your real goal is to prevent serious declines in the economy but, since the start of the Fed, there have been 18 recessions including the Great Depression and the most recent Great Recession. These downturns  have resulted in stock market crashes, tens of  millions of unemployed and untold business bankruptcies.

I scratch my head and wonder how you think the Fed is any type of success when all this has occurred.

I am especially confused, since Austrian business cycle theory (ABCT), developed by Mises, Hayek and Rothbard, has warned about all these things. According to ABCT, it is central bank money printing that causes the business cycle and, again you here at the Fed have certainly done that by increasing the money supply. Can you imagine the distortions in the economy caused by the Fed by this massive money printing?

According to ABCT, if you print money those sectors where the money goes  will boom, stop printing and those sectors will crash. Fed printing tends to find its way to Wall Street and other capital goods sectors first, thus it is no surprise to Austrian school economists that the crashes are most dramatic in these sectors, such as the stock market and real estate sectors. The economist Murray Rothbard in his book America’s Great Depression [4] went into painstaking detail outlining how the changes in money supply growth resulted in the Great Depression.

On a more personal level, as the recent crisis was developing here, I warned throughout the summer of 2008 of the impending crisis. On July 11, 2008 at EconomicPolicyJournal.com, I wrote[5]:

SUPER ALERT: Dramatic Slowdown In Money Supply Growth

After growing at near double digit rates for months, money growth has slowed dramatically. Annualized money growth over the last 3 months is only 5.2%. Over the last two months, there has been zero growth in the M2NSA money measure.This is something that must be watched carefully. If such a dramatic slowdown continues, a severe recession is inevitable.

We have never seen such a dramatic change in money supply growth from a double digit climb to 5% growth. Does Bernanke have any clue as to what the hell he is doing?

On July 20, 2008, I wrote [6]:

I have previously noted that over the last two months money supply has been collapsing. M2NSA has gone from double digit growth to nearly zero growth .

A review of the credit situation appears worse. According to recent Fed data, for the 13 weeks ended June 25, bank credit (securities and loans) contracted at an annual rate of 7.9%.

There has been a minor blip up since June 25 in both credit growth and M2NSA, but the growth rates remain extremely slow.

If a dramatic turnaround in these numbers doesn’t happen within the next few weeks, we are going to have to warn of a possible Great Depression style downturn.

Yet, just weeks before these warnings from me, Chairman Bernanke, while the money supply growth was crashing, had a decidedly much more optimistic outlook, In a speech on June 9, 2008, At the Federal Reserve Bank of Boston’s 53rd Annual Economic Conference [7], he said:
I would like to provide a brief update on the outlook for the economy and policy, beginning with the prospects for growth.  Despite the unwelcome rise in the unemployment rate that was reported last week, the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly.  Indeed, although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.  Over the remainder of 2008, the effects of monetary and fiscal stimulus, a gradual ebbing of the drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad should provide some offset to the headwinds that still face the economy.

I believe the Great Recession that followed is still fresh enough in our minds so it is not necessary to recount in detail as to whose forecast, mine or the chairman’s, was more accurate.

I am also confused by many other policy making steps here at the Federal Reserve. There have been more changes in monetary policy direction during the Bernanke era then at any other time in the modern era of the Fed. Not under Arthur Burns, not under G. William Miller, not under Paul Volcker, not under Alan Greenspan  have there been so many dramatically shifting Fed monetary policy moves. Under Chairman Bernanke there have been significant changes in direction of the money supply growth FIVE different times. Thus, for me, I am not at all surprised at the current stop and go economy. The current erratic monetary policy makes it exceedingly difficult for businessmen to make any long term plans.  Indeed, in my own Daily Alert on the economy [8] I find it extremely difficult to give long term advice, when in short periods I have seen three month annualized M2 money growth go from near 20% to near zero, and then in another period see it go from 25% to 6% . [9]

I am also confused by many of the monetary programs instituted by Chairman Bernanke. For example, Operation Twist.

This is not the first time an Operation Twist was tried. an Operation Twist was tried in 1961, at the start of the Kennedy Administration [10] A paper [11] was written by three Federal Reserve economists in 2004 that, in part, examined the 1960′s Operation Twist

Their conclusion (My bold):

A second well-known historical episode involving the attempted manipulation of the term structure was so-called Operation Twist.  Launched in early 1961 by the incoming Kennedy Administration, Operation Twist was intended to raise short-term rates (thereby promoting capital inflows and supporting the dollar) while lowering, or at least not raising, long-term rates. (Modigliani and Sutch 1966)…. The two main actions of Operation Twist were the use of Federal Reserve open market operations and Treasury debt management operations.. Operation Twist is widely viewed today as having been a failure, largely due to classic work by  Modigliani and Sutch….

However, Modigliani and Sutch also noted that Operation Twist was a relatively small operation, and, indeed, that over a slightly longer period the maturity of outstanding government debt rose significantly, rather than falling…Thus, Operation Twist does not seem to provide strong evidence in either direction as to the possible effects of changes in the composition of the central bank’s balance sheet….

We believe that our findings go some way to refuting the strong hypothesis that nonstandard policy actions, including quantitative easing and targeted asset purchases, cannot be successful in a modern industrial economy.  However, the effects of such policies remain quantitatively quite uncertain. 

One of the authors of this 2004 paper was Federal Reserve Chairman Bernanke. Thus, I have to ask, what the hell is Chairman Bernanke doing implementing such a program, since it is his paper that states it was a failure according to Modigliani, and his paper implies that a larger test would be required to determine true performance.

I ask, is the Chairman using the United States economy as a lab with Americans as the lab rats to test his intellectual curiosity about such things as Operation Twist?

Further, I am very confused by the response of Chairman Bernanke to questioning by Congressman Ron Paul. To a seemingly near off the cuff question by Congressman Paul on Federal Reserve money provided to the Watergate burglars, Chairman Bernanke contacted the Inspector General’s Office of the Federal Reserve and requested an investigation [12]. Yet, the congressman has regularly asked about the gold certificates held by the Federal Reserve [13] and whether the gold at Fort Knox backing up the certificates will be audited. Yet there have been no requests by the Chairman  to the Treasury for an audit of the gold.This I find very odd. The Chairman calls for a major investigation of what can only be an historical point of interest but fails to seek out any confirmation on a point that would be of vital interest to many present day Americans.

In this very building, deep in the underground vaults, sits billions of dollars of gold, held by the Federal Reserve  for foreign governments. The Federal Reserve gives regular tours of these vaults, even to school children. [14] Yet, America’s gold is off limits to seemingly everyone and has never been properly audited. Doesn’t that seem odd to you? If nothing else, does anyone at the Fed know the quality and fineness of the gold at Fort Knox?

In conclusion, it is my belief  that from start to finish  the Fed is a failure. I believe faulty methodology is used, I believe that  the justification for the Fed, to bring price and economic stability, has never been a success. I repeat, prices since the start of the Fed have climbed by 2,241% and there have been over the same period 18 recessions. No one seems to care at the Fed about the gold supposedly backing up the gold certificates on the Fed balance sheet. The emperor has no clothes.  Austrian Business cycle theorists are regularly ignored by the Fed, yet they have the best records with regard to spotting overall downturns, and further they specifically recognized the developing housing bubble. Let it not be forgotten that in 2004, two economists here at the New York Fed wrote a paper [15] denying there was a housing bubble. I responded to the paper [16] and wrote:

The faulty analysis by [these] Federal Reserve economists… may go down in financial history as the greatest forecasting error since Irving Fisher declared in 1929, just prior to the stock market crash, that stocks prices looked to be at a permanently high plateau.

Data released just yesterday, now show housing prices have crashed to  2002 levels. [17]

I will now give you more warnings about the economy.

The noose is tightening on your organization, vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or,  if you stop printing, another massive economic crash will occur. There is no other way out.

Again, thank you for inviting me. You have prepared food, so I will not be rude, I will stay and eat.

Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats.

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Footnotes

[1] http://www.amazon.com/Politically-Incorrect-Guide-Depression-Guides/dp/1596980966/ref=sr_1_1?ie=UTF8&qid=1335313972&sr=8-1

[2] http://www.nobelprize.org/nobel_prizes/economics/laureates/2010/press.html

[3] ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

[4] http://www.amazon.com/Americas-Great-Depression-Murray-Rothbard/dp/146793481X/ref=sr_1_1?ie=UTF8&qid=1335314537&sr=8-1

[5] http://www.economicpolicyjournal.com/2008/07/super-alert-dramatic-slowdown-in-money.html

[6] http://www.economicpolicyjournal.com/2008/07/alert-collapsing-credit.html

[7] http://www.federalreserve.gov/newsevents/speech/bernanke20080609a.htm

[8] http://www.economicpolicyjournal.com/2009/04/announcing-epj-quarterly-economic.html

[9]http://www.economicpolicyjournal.com/2008/07/super-alert-dramatic-slowdown-in-money.html

[10] http://www.frbsf.org/publications/economics/letter/2011/el2011-13.html

[11] http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf

[12] http://www.huffingtonpost.com/2012/04/03/federal-reserve-watergate-iraqi-weapons_n_1400645.html

[13] http://www.federalreserve.gov/releases/h41/Current/

[14] http://www.newyorkfed.org/aboutthefed/visiting.html

[15] http://fednewyork.org/research/epr/04v10n3/0412mcca.pdf

[16] http://www.economicpolicyjournal.com/2012/02/checkmate-new-york-fed-as-totally.html

[17] http://www.nytimes.com/2012/04/25/business/economy/survey-shows-us-home-prices-still-weak.html

Special thanks to the following, who helped me research and collect data for this paper: Stephen Davis, Bob English, Jon Lyons, Ash Navabi, Joseph Nelson, Nick Nero,  Antony Zegers

Categories: Articles from external sources Tags: , , , , , , , , , , ,

40 days and 40 nights of the quietest gold market since the crisis began…

May 4, 2012 Leave a comment

Submitted by Ben Traynor | BullionVault

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HOW COMMON is it for Gold Prices to be this range bound? asks Ben Traynor atBullionVault.

At Wednesday afternoon’s London Gold Fix, Dollar Gold Prices were $1648 an ounce. This marked the fortieth trading day in a row that gold fixed between $1600 and $1700.

The last PM Fix outside this range was on March 5 ($1705 an ounce). Spot GoldPrices did manage to poke their head above the $1700 mark later that same week, but since then gold has gone pretty much nowhere. Is it common to see such a protracted period of sideways trading?

One way of gauging how much (or indeed how little) Gold Prices have moved in that time is to calculate the coefficient of variation (CV) – simply the standard deviation divided by the mean average – and compare it with rolling 40 day periods.

The chart below does exactly that, going back to 1968, the year the London Gold Pool collapsed. The vertical green lines represent the final day of any 40 day period with a lower CV than the 40 trading days just gone, with the Gold Price shown over the top (left hand axis):

By the CV measure, gold has not had a quieter 40 days since mid-2007, right at the start of the financial crisis.

A block of six trading days – August 30 to September 6, 2007 – each marked the end of quieter 40-day periods than the one we have just had. There is a similar cluster of four days in July 2007.

As you can see from the chart, these days have tended to come in consecutive blocks – which makes sense since we are taking rolling statistical measures. This allows us to pick out specific quiet periods when Gold Prices were not really doing much.

Over the last 10 years, there have been only five 40-day periods quieter than the one we have just had – the two in 2007, another two in 2005, and one towards the end of 2002.

By contrast, the 1990s saw loads of periods quieter than the current one. So too did the late 1960s and early 1970s, as we would expect since gold was, until August 1971, still officially tied to the Dollar at $35 an ounce (though a two-tier market allowed for a fluctuating price for non-central bank transactions).

Of course, 40 trading days is a rather arbitrary span of time to pick. But similar patterns emerge when we look at other rolling periods.

Wednesday 2 May 2012 also marked the quietest 20 trading day period by the CV measure. Here’s the chart for rolling 20-day periods going back to 1968:

The quietest 60-day period so far this year was actually that ended on April 13. Nonetheless, for ease of comparison, here is the chart showing 60-day periods with lower CVs than the period ended Wednesday this week:

We can draw a few observations from the above:

  • Gold Prices have rarely been this quiet since the current financial crisis began
  • When the last bull market ended in 1980, it didn’t end quietly – hence the big gaps between the late 1970s and mid-1980s
  • If history repeats, these relatively flat Gold Prices could be a precursor to the Big Move (as was the case in the mid-1970s), or they could herald a long, slow decline (see mid-to-late 1980s)

Something else happened this week. As my BullionVault colleague Adrian Ash notes, spot market Gold Prices on Monday ended a calendar month lower for the third month in a row – a rare event indeed in a bull market.

It is also worth checking out Adrian’s log scale chart (reproduced below), which shows that Gold Prices over the last ten years have made a much smaller proportionate gain (shown as the vertical distance moved) than they did in the ten years to 1980:

Putting this all together, both bulls and bears could make a case. The bulls might argue that it is just too quiet for this to be the beginning of a sustained downtrend, and that Gold Prices are taking a breather before making another move up.

Bears might counter that since this bull market has seen a gentler rise, it may well be followed by a gentler decline, which could be what we are seeing right now.

Ultimately, Gold Prices over the long run are determined by fundamentals. One of the key fundamentals is real interest rates i.e. nominal rates minus the rate of inflation. And the key central bank to watch is, of course, the Federal Reserve.

There have been signs in recent weeks that the US economy is picking up. This has dampened expectations of further quantitative easing, and has also raised the prospect that the Fed could raise its policy interest rate sooner than previously expected. Few would go so far as to declare the crisis over, but doubts have crept in about how accommodative the Fed will remain.

I believe this uncertainty is the main reason trading volumes have been low, and Gold Prices have been stuck in a range. It doesn’t help that we are headed towards summer, when the gold market tends to be much quieter (2011 notwithstanding).

If the tentative US recovery continues, more investors will likely surmise that QE will not happen, and that a rate hike will be sooner rather than later. On the other hand, if the recovery stalls, QE could shoot back up the agenda.

Sooner or later, Gold Prices will break out of this range. Whether it will a break higher or a break lower depends a great deal on the health of the US economy.

Buying Gold? Get the safest gold at the lowest prices with BullionVault…

Categories: Articles from external sources Tags: , , , ,

GoldMoney & BullionVault clients of all people most to be pitied?

April 13, 2012 3 comments

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Gold priced in US$ has been declining from its high in August 2011. Wall street has it that it’s because the euro zone debt crisis is now under control, the US economy is recovering, inflation is low and the US unemployment situation is improving. Oh, not to forget there has been no more money printing and the Dow has gained some 20% since gold’s peak. In short, improving outlook has caused investors to move out of gold’s safe haven into riskier assets.

Less demand leads to lower gold prices as reflected in the chart below. Some analysts say the 11-year bull market in gold is over, gold is in a bubble that has or is about to bust.

If that be the case, clients of GoldMoney & BullionVault (two of the more established and popular physical gold dealer and custodians) have got it all wrong and hence are “of all men most to be pitied”. Look at how their collective gold holdings have been increasing relentlessly, even during periods of sharp price declines.

This short term chart covering the period since gold’s intermediate top in August 2011 shows steady increase of total holdings from quarter to quarter. The growth at BullionVault is particularly impressive.

GoldMoney & BullionVault: Quarterly Change in Gold Holdings

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The same goes for silver.

GoldMoney & BullionVault: Quarterly Change in Silver Holdings

What then can be said of the apparent dichotomy between the declining trend in gold & silver prices and the increasing demand seen in the metal purchases? Just two words:

Paper & Physical

Prices reflected in the charts come about mainly by “traders” trading paper gold & silver. Traders is put between quotes because they are not the normal traders you’d expect to find in a free market. Most of the trades that determine the price trends are placed by very few large bullion banks and High Frequency Trading (HFT) machines. Yes, the prices are greatly influenced by trades initiated by machines preprogrammed with sophisticated algorithms to set the price which ever way the owners wanted them to go. In case you’re wondering, who may be the people on the other side of these trades? It’s people like this, who sets up trades hoping to beat the supercomputers on the other side only to get sucked in and forced to dump when their stops are hit.

On the other hand, real humans are behind the accumulation of physical metals at BullionVault, GoldMoney and many other private vaults. These are the same humans that do not believe the spin of the MSM, but hold on to the view that the financial crisis is not yet behind us. They believe that the worse is yet to come. I’m one of them. We understand that holding our savings and retirement funds in paper assets and paper money is most likely to result in a massive loss of purchasing power through hyperinflation when the real crisis hits.

We’re not 100% sure it will happen, neither can we be 100% sure it won’t happen.

What about you? Paper or physical?

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Data source

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Categories: Articles by PoliticalMetals Tags: , , , , , , , , , , , , , , , ,

Government admission of price suppression: Report by South Carolina State Treasurer’s Office

April 6, 2012 1 comment

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[Active updates: Developing stories] The South Carolina Treasurer’s Office, acting upon a directive from the state legislature, has recently published a report on the advisability of investing in gold and silver. Basically, the state legislature wanted to know if it’s wise to invest public funds under it’s custody in gold & silver.

 Here’s what the Treasurer’s Office has to say about itself:

Our mission is to serve the citizens of South Carolina by providing the most efficient banking, investment and financial management service for South Carolina State Government. Our commitment is to safeguard our State’s financial resources and to maximize return on our State’s investments.

This is a tall order, hence we can assume that the report must be well researched and credible.  It concluded that it is not advisable to invest public funds in gold & silver because:-

  1. There’s escalating market speculation
  2. Current value (I think they mean price) is too high
  3. Market possibly in a bubble
  4. South Carolina Code of Laws states that the Treasurer has “ full power to invest” in  debt instruments of the US government and corporations, but makes no mention of investments in derivatives of gold & silver. Hence investing in gold & silver derivatives may “create a legal conflict”

While the timestamp of the document was 27 Feb 2012, it can be assumed that the report was prepared soon after the end of September 23, 2011 due to this inclusion. From the perspective of a short term investment, that was a pretty good call, considering the fact that gold and silver have been taken down to $1624 and $31.40 respectively as I write.

However, this piece is not about how good the Treasurer’s Office was at making an investment call based on price. Neither is it about whether gold & silver is in a bubble. These conclusions (2) & (3) are opinions of the Treasurer’s Office, which are subjective. Of greater interest are the facts revealed in the body of the report.

Regular readers of this blog would have noticed that there are several key issues that are repeatedly discussed or highlighted here (through news feeds or third party contributions). They include:-

  1. Gold & silver prices are being suppressed
  2. Central Banks & major bullion banks are suppressing their prices
  3. Naked short selling is one of the price suppression mechanism
  4. Bullion Banks and exchanges practice fractional reserve bullion banking
  5. Stay out of gold or silver bank accounts, ETFs, Certificates, and all forms of derivatives
  6. The safest way to own gold & silver is to hold physical gold & silver

Items (1) to (4) are often disputed by the mainstream media and investors, sometimes referring to them as conspiracy theories. Hence, it is most interesting to see what this government published report has to say about these 6 issues.

Price Suppression is Real

In one short paragraph, this report confirms in no uncertain terms the truth behind the so called “conspiracy theories”. Not only does it confirm the existence of price suppression, it discloses the WHOs and the HOWs!

Risks of holding gold through ETFs, Certificates, Bank Accounts & other Derivatives

It has been repeatedly emphasized here that the only secure means of owning gold & silver is by holding physical coins and bars in your own possession or stored in a private vault outside the banking system. Anything else is a derivative - a paper or electronic representation of the real thing.

This report explains the nature of these derivatives and lists the risks associated with each, together with reasons why the Treasury’s Office advised against investing in them.

The full report in pdf is available for download at the South Carolina Treasurer’s website. Text from relevant sections is reproduced below with comments related to the 6 items above highlighted. Most of the remarks are self explanatory. There are, however, two groups of comments that warrant some discussion.

1. Allocated & Unallocated Accounts

Ways to Invest: Certificates
Unallocated gold certiñcates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the bank’s gold on deposit. Allocated gold certificates should be correlated with speciñc numbered bars, however it is difficult to prove whether a bank is improperly allocating a single bar to more than one investor.

Ways to Invest: Accounts
One of the most important differences between accounts is whether the gold is held on an allocated or unallocated basis. Another major difference is the strength of the account holder’s claim on the gold, in the event that the account administrator faces gold-denominated liabilities, asset forfeiture, or bankruptcy.

The above describes two products offered by banks to clients who want to invest in gold (or silver) without having to deal with the physical metals. For example, when a bank accepts $2,000 from a customer and issues a gold certificate or credits the customer’s gold account under the unallocated system, the bank is not obliged to buy and store 1.2 oz (at current price) of gold on behalf of the customer. It holds only a tiny portion of that amount in gold. Hence when many of its the customers decide to redeem their certificates at the same time, the bank will not have sufficient gold to deliver. This is what’s referred to as a “run on the bank’s gold on deposit”. The same applies when depositing cash in your bank. The practice of keeping only a tiny fraction of what’s rightfully belonging to the customers (gold or cash) is referred to as fractional reserve banking.

When selling allocated gold products, the bank is legally required to hold 100% of the customers deposit in physical metal. For example, if a customer deposits sufficient cash to own a 400 oz gold bar and is assigned a bar bearing serial No: AGR Matthey 156571, how can one be sure that the same bar or a portion thereof is not assigned to another customer at the same time? That’s the issue raised by the report - and the risk is real.

This brings us back to “the only secure means of owning gold & silver is by holding physical coins and bars in your own possession or stored in a private vault outside the banking system”. If you have to use a third party to store your metals, use specialized private vaults instead, because banks operate on a fractional reserve banking system.

There are many companies outside the banking system that offer secure vaulting services. Generally, they have very high transparency, including publishing audited client holdings on the web for public scrutiny (without any login required). Of course clients’ ID are anonymous, and known only to the operator and the client.

Try these links:
GoldMoney bar list and BullionVault client holdings. Their reviews can be found here.

Learn more about private vaulting services, including issues like ownership, custody, bailment, counter-party risks, and performance risks. 

2. Reason for not investing in physical gold & silver

The report listed 5 ways to invest in gold & silver - ETPs, Certificates, Accounts, Derivatives and physical coins & bars. Notice how it highlights & explains all the risks associated with ETPs, Certificates, Accounts and Derivatives and the reasons why it is not advisable for the Treasury to invest in these.

Notice also that there are NO risk associated with physical metals. The only reason given for not investing in coins and bars is “South Carolina does not have the capacity to store or funding to secure gold and silver bullion”.

What a lame excuse! Do they not know that in April last year, “The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion“?

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Proviso 89.145 GP:
Gold & Silver Investments
Office of State Treasurer

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GOLD AND SILVER AS AN INVESTMENT:
Historically, investors have purchased gold as a hedge against an economic, a political, or a currency crisis. A decline in investment markets, a growing national debt, a weak currency, increasing inflation, military conflicts and social unrest are the most common reasons for investment in gold. Currently, gold and silver are at historic highs leading many expert investors to conclude that a bubble has been created in the precious metals market. Since the US recession began, the value of gold and silver has increased as investment markets perform poorly, troublesome economic news is announced, and when uncertainty in international markets intensifies.

Similar to other commodities, the value of gold and silver is determined by supply and demand, as well as speculation. The Federal Reserve, The London Bullion Market Association, JP Morgan Chase, and HSBC Holdings have practiced fractional-reserve banking and engaged in naked short selling causing artiñcial price suppression.

There are several ways to invest in gold and silver: bars, coins, ETP’s, certificates, accounts, and derivatives. If a state were to choose to invest in gold (and silver), it would likely choose to invest by:

1. ETP’s-Exchange Traded Products. This allows the stakeholder to invest in bullion without having to store bars and coins. The ñrst gold ETF (Exchange Traded Fund) was created in 2003 and has been viewed largely as a success, but has also been compared to investing in mortgagebacked securities. The annual expenses of the fund (storage, insurance, and management fees) are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. ETF’s are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UIT), but differ from traditional open-end companies and U]T’s. The main differences are that ETF’s do not sell directly to investors and they issue their shares in what are called Creation Units. Also, the Creation Units may not be purchased with cash but a basket of securities that mirrors the ETF‘s portfolio. The Usually, the Creation Units are split up and re-sold on a secondary market.

2. Certificates- allow investors to avoid the risks and costs associated with the transfer and storage of bullion by taking on a set of risks and costs associated with the certificate itself. Banks may issue gold certificates for gold which is allocated (non-fungible) or unallocated (fungible). Unallocated gold certiñcates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the bank’s gold on deposit. Allocated gold certificates should be correlated with speciñc numbered bars, however it is difficult to prove whether a bank is improperly allocating a single bar to more than one investor. The US ñrst authorized the use of gold certificates in 1863. By the early l930’s the US placed restrictions on private gold ownership and therefore, the gold certificates stopped circulating as money, but certificates are still issued by gold pool programs for investment purposes.

3. Accounts- Many banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency on a fractional reserve (non-allocated, fungible) basis. Pool accounts, facilitate highly liquid, but unallocated claims on gold owned by the company. Digital gold currency systems operate like pool accounts and additionally allow the direct transfer of fungible gold between members of the service. Different accounts impose varying types of intermediation between the client and their gold. One of the most important differences between accounts is whether the gold is held on an allocated or unallocated basis. Another major difference is the strength of the account holder’s claim on the gold, in the event that the account administrator faces gold-denominated liabilities, asset forfeiture, or bankruptcy.

4. Derivatives- The product symbol for gold futures is GC, and it is traded in a standard contract
size of 100 troy ounces. In the US, gold futures are primarily traded on the New York Commodities Exchange (COMEX). As of 2009 holders of COMEX gold futures have experienced problems taking delivery of their metal. Along with chronic delivery delays, some investors have received delivery of bars not matching their contract in serial number and weight. Because of these problems, there are concerns that COMEX may not have the gold inventory to back its existing warehouse receipts.

ADVISABILITY:
There is no statute preventing the State from investing in gold and silver. The various methods of investment in gold and silver each carry different and often significant risks, the foremost being speculation. As the US has experienced the recent bursts in the housing and tech bubbles, it is important to take caution when contemplating an unconventional investment. Taxpayer money (state funds and state pension) across the US has not typically been used to invest in gold or silver bullion.

Recently, with the uncertainty in global markets, the devaluation of the dollar, rising inflation, and a flat US economy, there has been a renewed interest in either moving back to a gold standard, investing in gold or both. The value of gold and silver has significantly increased in the last decade, meaning it would cost a great deal to invest at this time.

Risks:
1. Bars and coins- South Carolina does not have the capacity to store or funding to secure gold and silver bullion. For these reasons the State Treasurer’s Office does not advise investing in gold and silver bars and coins.

2. ETP’s- The armual expenses and costs associated with this type of investment are high. In recent years there have been issues surrounding gold ETP’s. The purchase price provides the investor with a fluctuating amount (in weight) of the metal. Over time, as value increases and more investors participate in the fund, the amount of metal owner by the investor decreases. ETP’s can also be split and sold on the secondary market. For these reasons the State Treasurer’s Ofñce does not advise investing in ETP’s for gold and silver.

3. Certificates- Certificates for allocated gold present an accountability problem. Allocated gold certificates are supposed to be correlated with speciñc numbered bars; however, it is difficult to verify whether a bank is improperly allocating a single bar to more than one investor. Also, unallocated gold certificates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the bank’s gold on deposit. This is in conflict with S.C. Code of Laws 1976 SECTION 11-9-660. For these reasons, the State Treasurer’s Office cannot advise investing in gold and silver certificates.

4. Accounts- Similar to the risks associated with gold and silver certificates, allocated and unallocated metals held in accounts produce similar accountability problems. The strength of the account holder’s claim on metals is subject to the account administrators liabilities, assets, and/or solvency. Per S.C. Code of Laws 1976 SECTION 11-9-660, the State Treasurer’s Office cannot advise investing in gold and silver accounts.

5. Derivatives- Over the last three years, gold futures traded on the New York Commodities Exchange (COMEX) have encountered significant accountability problems. Holders of COMEX gold ñltures have frequently experienced delivery delays of their metals. Once delivered, there have been many reports of inaccurate weights and serial numbers on bars that do not match the holder’s contract. For these reasons the State Treasurer’s Office does not advise investing in gold and silver derivatives.

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Gold: April 2012

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Having read the above, it may now be easier to make sense of the sharp price decline for both gold & silver over the past 2 days. Lets now ask some questions. Was the price action due to:

  • Market forces or Price Suppression in action?
  • Falling Demand or Naked Short Selling?
  • Human Traders or High Frequency Traders (HFTs)?
Historically, investors have purchased gold as a hedge against an economic, a political, or a currency crisis. A decline in investment markets, a growing national debt, a weak currency, increasing inflation, military conflicts and social unrest are the most common reasons for investment in gold
Have any of the issues above that formed the rationale for purchasing gold (and silver) been resolved?
Recently, with the uncertainty in global markets, the devaluation of the dollar, rising inflation, and a flat US economy, there has been a renewed interest in either moving back to a gold standard, investing in gold or both.

The mainstream media attributed this week’s sharp price decline to  improving economy, low inflation and no imminent QE announcements following the release of the latest FOMC meeting minutes. Given that the above statement was published just 5 weeks before the FOMC minutes, who is lying?

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Developing Stories

12 Apr:
Jason Hommel explains what Blythe Masters actually meant by “the underlying client position that we’re hedging”.

11 Apr:
Ted Butler, the pioneer of silver manipulation investigation finally broke his silence over the Blythe Masters denial video clip. By far, this is THE best, most level-headed, objective rebuttal to Masters’ famous words that they are “not running a large directional position”. Read “JPM’s TV appearance” posted at Silverseek.com.

10 Apr: 

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7 Apr:
Mike Maloney on RT discussing gold & silver manipulation, Blythe Masters denial of JPM’s role in price manipulation, “First government admission of price suppression” & High Frequency Sheering. Must Watch!

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6 Apr: 

Further Reading:

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Categories: Articles by PoliticalMetals, Commentaries [Video], News Tags: , , , , , , , , , , , , , , , , ,
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