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“When you own gold you’re fighting every central bank in the world”. Jim Rickards

To a great extend, that holds true for silver as well. This week, holders of Political Metals lost a battle, but certainly not the war. Measured against the USD, gold and silver are worth less compared to a week ago by 9.6% and 26.3% respectively.

It all started with Ben Bernanke’s statement, following the 2-day FOMC meeting, stating the obvious - that “there are significant downside risks to the economic outlook, including strains in global financial markets”. His antidote was a plan to purchase $400 billion of long-term Treasury bonds and to sell an equivalent amount of short-term debt. More commonly referred to as “Operation Twist 2″, this plan seeks to further reduce long term interest rates, after having pledged to hold short term rates practically at zero until 2013.

That announcement, made in the backdrop of the Eurozone debt crisis and news of slower growth in China, sent global stocks and commodity markets into a waterfall decline. This set up was ideal for the bullion banks who have massive gold and silver short positions. All they needed to do was to pull the trigger, and that’s exactly what they did on Thursday. Silver was pushed down sharply through its key 50 and 200 day moving averages, triggering an avalanche of tech funds selling the following day.

Going for the final kill of the week, news of yet another margin hike by CME (gold by 21%, silver by 16%) leaked into the market towards the end of Friday’s trading day. That further fuelled the selling, pushing silver briefly below $30 before closing at $31.08 - down 26.3% for the week.

In other markets this week, the Dow suffered its biggest loss since 2008. In four days U.S. stocks lost $1.1 trillion in value.  The MSCI all-country world share index (tracking thousands of stocks from developed and emerging countries) recorded its second worst quarter in 23 years and the 30-year bond rates dropped 55bps - the biggest move since the 1987 Black Monday.

So there you have it, Dr. Ben Bernanke, bullion banks & CME working together in perfect harmony. I don’t believe for a moment that the resulting market turmoil was any surprise to Bernanke. Despite saying that gold is not money, he’s smarter than most people made him out to be. After all, he achieved an SAT score of 1590 out of 1600, graduated from Harvard and has a PhD in economics from MIT. Contrary to its statutory mandate of foster maximum employment and price stability, this market turmoil I believe is a piece of precision engineering to achieve some larger agenda. This round is yours, congratulations Ben!

This engineered global markets take down could be part of the deflationary phase that Mike Maloney talked about, which is a prelude to the hyper-inflation phase. They have to assist the bullion banks cover their shorts and bring the Political Metals price down to a lower base before starting the next round of QE or equivalent. Marc Faber told ThomsonReuters that “if the S&P drops to around 900-950, we’ll get QE3 for sure”.

Four ways to view the developments over the past week

If you’re reading this blog, you’re not a professional or a day trader, possibly someone already invested in gold or silver, someone holding some Political Metals (I distinguish between investing & holding here) or someone in the process of researching the matter. As non professional traders, we have to look through and not at the turmoil unfolding before us. All of the bloody carnage above are on “paper” or bits on silicon - illusionary financial derivatives of something tangible (like gold and silver) or derivatives of something totally virtual and non-physical (like interest rates, bonds, debts, CDS, etc). Real or imaginary, they are all derivatives backed by nothing more than a promise or lies of a third party.

Unfortunately, in so far as gold & silver is concerned, the outcome of the imaginary paper price wars above gets applied to the physical world. Price discovery currently comes from the paper derivatives market. Banks and multi billion dollar hedge funds throwing thousands of futures contracts or bets at each other (most of which are done through computerised High Frequency Trading algorithms) determine the price of the coin or bar you pick up at your local bullion dealers. Until such time when this absurd situation of the tail wagging the dog changes, I suggest 4 possible ways for you to view the developments over the past week, using silver as an example.

There’s a big difference between Investing(1) & Holding(2). If you adopt approach (1), and are smart enough to handle scenario (3), congratulations! Trading this dip or swapping silver for gold just before the GSR shot over 56 would have reaped a handsome return. After years of following newsletter writers, both paid and free, I came to the conclusion that attempting to achieve (3) is at best illusionary, and at worst risky. This is particularly true in a manipulated market. Take a look at some of the forecasts by well respected industry players here. Either they missed this week’s price action or are not telling us something. Richard Russell puts it this way:

I look at gold and silver, not as a play for profits, but as an accumulation of hard assets, in a world that it drowning in fiat money, and a world that will probably print trillions more of irredeemable paper.

Finally, if you’ve been waiting patiently (4) or have spare dry powder, congratulations! While the paper price of gold & silver gets whacked, physical demand is very strong. KWN reported that Sprott Money temporarily runs out of physical silver. So, get ready to pick up your discount. Not necessarily immediately, but then again, picking the absolute bottom can also be illusionary. Best industry advise is cost averaging.

Updated:

• 28 Sep “On the basis of the hard information available early this week, it is highly likely that gold and silver prices were pushed down rather than fell as a result of free market trading.” Read Patrick A. Heller’s take on how the recent gold & silver market manipulation was orchestrated.
• 30 Sep “Engineered fall in gold and silver; Trying to scare people out of precious metals“ Gerald Celente

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Towards the end of Chris Powell’s speech at the 18th CLSA Investors’ Forum in Hong Kong, he addressed the all important question Why hasn’t gold kept up with inflation?

It’s because Western governments found ways of vastly increasing the supply of gold without having to go through the trouble of mining it — to dishoard and lease it from central bank reserves and to issue certificates of deposit against gold that never existed in the first place.

“Why” is supposed to be a basic question of journalism. But it has fallen out of financial journalism when it comes to gold, he lamented.

In recent years, and especially in recent months, I have spent much time explaining the gold price suppression scheme to leading financial journalists in the West. I have given them the documentation. Some of these journalists seemed interested. But none has ever reported anything about the issue. One writer who works for a major news agency in the United States was intrigued enough to call the Federal Reserve and ask about its gold swaps. She got a very telling “no comment.” But unfortunately she could not get her editor’s permission to write a gold story.

Frustrating as all this is, it is not too surprising. After all, who are the major advertisers in the Western financial news media and the major sources of financial news? The market manipulators and governments themselves. And journalists seem to take for granted that central banks operate in secret, particularly in regard to gold, so there’s no point in questioning them — even though central banking now determines the value of all capital, labor, goods, and services in the world, and does so in secret.

So here I am in Asia, which is a major victim of the gold price suppression scheme. Maybe there will be more curiosity and indignation about it here.

But Asia is not the only victim of this scheme. My own country may be the biggest victim. For this scheme has helped to corrupt the United States, destroying our once-free markets and the accountability of our government.

We in GATA do what we can, even though, from our beginning, we have wondered whether we could really presume to speak for gold. And not just for gold, of course — we are not idolaters — but for the economic and political liberty of individuals and the national sovereignty that gold serves and stands for. With gold always under attack precisely for what it represents, and with no others coming forward to defend it for what it represents, with even the gold mining industry’s main trade association refusing to acknowledge the attack, we have hoped that any presumption on our part might be forgiven.

We remain largely amateurs. At the outset we did not half understand what was going on and what we were setting about to do. Our name preserves that imperfect understanding. We thought we had discovered just another anti-trust violation. It was a while before we perceived that we were up against government policy and that most of what we were discovering had been discovered long ago, at least in principle, just not well taught, publicized, preserved, and made timely again.

Because it can work only through surreptitiousness and deceit, this government policy will be defeated when it is more widely understood — and every day it is being better understood, because it is getting so brazen. It was more brazen than ever the other day when Switzerland devalued its franc, the world’s leading “safe haven” currency, apparently leaving the “safe haven” field exclusively to gold. But just a few minutes before the Swiss franc’s devaluation was announced, unidentified sellers dumped thousands of gold futures contracts on markets around the world, causing the gold price to plunge along with the Swiss franc. These sellers plainly did not aim to make a profit from their gold holdings; if they had intended to make a profit, they would have sold gradually into the market. No, they meant to knock the price down hard, and they did.

These sellers almost surely were central banks. But as far as I could tell, no Western journalist has yet put a question to any central banker about that strange and counterintuitive action in the gold market.

I ask for your help in forcing an end to the gold price suppression scheme. I ask in the cause of giving individuals, nations, and all humanity a chance at democracy, liberty, and limited government with a neutral, fair, and impartial international currency that serves not just one government or another or one class or another but rather the whole brotherhood of man.

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> Read the full speech here

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Chris Powell, is the treasurer/secretary of Gold Anti Trust Committee and a newspaper editor in Connecticut.

By Jack Ewing | NYT

FRANKFURT — Europe appeared to be lurching toward a moment of decision in its sovereign debt crisis Sunday, as Greece struggled to meet conditions for additional  aid amid rising German impatience with the cost.

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Here’s the initial market reaction in early Asian trading over the weekend’s development

This is my response to the article A challenge to debate: How safe is gold? by Sam Chee Kong of Malaysia Chronicle. Since links in the comments section don’t work, here’s the fully linked comment.

“But despite having one less competitor in the safe haven basket, the price of gold did not rocket up as expected. Instead it went down about $50 when the CHF news hit the streets.”

That’s because the price of gold as we know it is manipulated, although its value remains untouched. The “gold price” that the market uses is influenced largely by gold futures and options trading at the CME, which are essentially gold derivatives or “paper gold”. High Frequency Trading (HFT) by bullion banks largely determine the price of paper gold which in turn is adopted as a basis for this debate.

Because of this, gold’s price action does not make sense most of the time, and the case in point is the one you cited above. If you assume that the gold price is a reflection of the value of physical gold in a free market, your observation and conclusion is spot on. If however, you factor in the issue of manipulation, you will come to a totally opposite conclusion.  In the event cited above, gold was taken down five minutes before the announcement and the subsequent plunge of CHF. See this minute-by-minute chart of CHF and gold price actions.

If one argues that the gold price action was because of leaked news, should not the same apply for the CHF/EUR chart? To understand what happened behind the scene, listen to the comments by fund manager Ben Davis of Hinde Capital (4mins into the audio clip) and read the analysis by professional commodities trader Dan Norcini.

For in-depth discussion on manipulation of gold (& silver), visit politicalmetals.com to understand the political nature of gold and silver. Only then can you understand why gold (& silver) prices behave the way they do and why you should view them as the ultimate safe haven and store of value compared to fiat currencies or any financial instruments and paper derivatives.

I could do a point by point rebuttal of the whole article, but it’ll be quite pointless if this fundamental premise upon which the whole debate is based is not sorted out first. In the interim, just ignore the minute-by-minute, hourly, daily or even weekly price of gold. They’re all noise due to massive manipulation. To make sense of the place of gold (& silver) in the larger scheme of things, look at their prices on a monthly and yearly chart. While the powers that be are able to do massive manipulations to paint the tape on short term charts, this effect is less pronounced in long term charts.

Conclusion:

The current price discovery mechanism of gold is akin to the tail wagging the dog (paper gold influencing physical gold). Coupled with central bank manipulations, it will be a futile exercise to engage in a debate over gold’s role in one’s portfolio based on short term price actions. However, things are looking brighter going forward. With the expected opening of the Pan Asia Gold Exchange (PAGE) in China by the end of this year, Comex will no longer have the monopoly to determine the price of paper gold, and by extension, that of physical gold. When we finally see the dog wagging its tail, the proper price discovery mechanism for gold would have been in place. By then, gold’s role will be so evident this debate becomes unnecessary.

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The Morning After in Pictures

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Dow/Gold Ratio

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Dow/Silver Ratio

Silver has not been running as fast as gold recently. This flight to safety money usually starts to chase gold, with silver catching up later. Gold/Silver Ratio currently stands at around 44, and that offers a great opportunity to stack up on silver.

Gold/Silver Ratio

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By ZeroHedge | Aug 3, 2011

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Two things happened when the Senate voted in the “Bipartisan” plan into law yesterday:

i) deferred debt on the Treasury’s balance sheet finally caught up with reality, and

ii) as a result of i) America’s Debt/GDP just hit a post World War 2 High of 97.2%.

As the Daily Treasury Statement as of last night indicates, total US marketable debt surged by $124.6 billion, while debt in intragovernmental holdings (Social Security, Government Retirement Accounts, etc), soared by $113.6 billion, for a combined one day change of $238.2 billion, the single biggest one day increase of US debt in history.

Obviously this is a result of massive underfunding and disinvestment in the various government retirement accounts as well as due to deferred debt which was to be booked since the debt was breached on May 16. However, how marketable debt could increase by a whopping $125 billion without any actual auction settlement is slightly confusing. Just as confusing is that according to the endnote in the debt subject to limit calculation, the new ceiling is not the $900 billion increase as requested, but only $400 billion more than the $14.294 billion previous, or at $14.694 billion.

We hope this is some Treasury type or misunderstanding as this new ceiling will be breached in a month. And the last thing we need is this whole debt ceiling drama back again in September. One thing there is no confusion about, however, is that based on the latest gross debt number of $14.581 trillion, and the just reported Q2 GDP of $15.003 billion, total US debt to GDP is now a post World War II high of 97.2% (and that excludes the GSE off balance sheet debt).

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