“We have never, ever seen these levels of demand for physical gold and silver." -- Peter August, CEO of Australian Bullion Co., 10/9/11 in an interview with KingworldNews
Dear All,
Three short months ago Dexia, the now failed Franco-Belgian bank passed the European Banking Authority's phony 'stress-test.' Perpetuating the charade of solvency continues to be the policy of both the ECB and the U.S. Federal Reserve with respect to the largest European and U.S banks.
The continuing drama over how Europe intends to resolve its banking and sovereign crisis is precisely that -- drama. The Fed and the U.S. government will ultimately bail out Europe, covertly if need be -- carte blanche. It is not in the Fed's DNA to allow the large U.S. banks to suffer the resulting swap obligation triggers from European defaults. The further liquidity contracts the more currency the Fed will create. The price for this will be a degraded dollar relative to the gold price.
On Thursday JPMorgan Chase released its quarterly earnings, which "beat expectations" by 10 cents per share. Consistent with all other manners by which this TBTF institution conducts itself, JPM -- which in the non-fraudulent world fell far short of meeting consensus -- goosed its earnings by reporting a non-cash accounting gain of $1.9 billion or 29 cents per share resulting from ‘debt revaluation.' The uninitiated might guess that the company added to its earnings the increase in the market value of bonds or loans the company owns. No ma'am. Sanctioned by the ethical perverts at the Federal Accounting Standards Board, JPM increased its earnings by claiming as income the decrease in the market value of the debt it owes. Under the logic that it could reacquire its own debt at a discount to the face amount it originally borrowed, the company reported such amount as current earnings. In other words the company reported as profit the measured deterioration of its own creditworthiness as expressed by the decrease in the market value of its debt obligations. The company did not actuality repurchase any debt, mind you. How Wall Street and the financial media accept this boggles the mind.
Don't expect JPM to undertake any such revaluation of its $80 trillion in notional derivative obligations, for if the company were to come clean on its true exposure thereunder it would bury the company's equity many times over. A mere 0.0025 degree movement in JPM's stated assessment of its exposure against its derivative book's notional value would wipe out the entirety of the bank's net worth.
The trend...
The Telegraph: Qatari wealth fund plans $10bn gold buying spree
WSJ: Central Banks Add to Gold Holdings
Foreign Central Banks Selling US Treasuries at Unprecedented Levels
WSJ: Dubai Gold Buyers Switching from Jewelry to Bullion
Friday afternoon I took the subway down to Zuccotti Park in lower Manhattan where the 'Occupy Wall Street' crowd is camped out. It was a rainy afternoon but I was able to get a reasonable sense of the assembly and had the opportunity to converse with a number of the Occupiers.
This is a well educated group. While every protest movement brings out the usual assortment of psychotics, to my observation their numbers were rather small in and around Zuccotti Park. What I was hoping to find was a cohesive mass of Occupiers incensed at the dichotomy between the fate of those who caused the financial crackup and those who are suffering from it, and clearly this is an important component of the Occupation. What is not so crystalline however is the Occupiers' understanding of exactly who it is that caused the crackup, although I did note this one sign which references but one of the Wall Street elite enablers: "Mr. Clinton: Why Did You Repeal Glass-Steagall?" The larger theme of the Occupation appeared to be the bashing not so much of Wall Street fraudsters specifically but of capitalism generally.
The rather amorphous protest movement will be quite productive if it is able to coalesce and target its anger toward the U.S. Federal Reserve and the small group of financial elitists who hijacked our financial markets at the expense of capitalism. There seemed to be a general sense among the protesters that capitalism has done them in when in reality what this country now suffers from is a dearth of free markets, they having been replaced by a banking oligarchy that steals from rigged markets at every opportunity.
The disjointed finger-pointing played out earlier in the week with the Occupiers marching to the homes of among others, David Koch and Rupert Murdoch, who as far as I can tell were singled out merely because they are billionaires with right-leaning political orientations. This is not to defend these two of anything in particular, only to point out that they are each more than several connections removed from Wall Street's fraud central -- there being far better targets for the protesters' wrath. The Occupiers might start by seeking the specific heads (figuratively speaking of course) of these three men, who as much as anyone, sowed the seed for the takeover of the U.S. government by kleptocrats.
So where will this lead? Ironically, its most immediate effect will likely be to encourage an acceleration of proactive Fed activity, precisely the Keynesian mischief that facilitated the credit bust to begin with. When there is marching in the streets politicians and central bankers move into full cowardice mode. The political and academic elitists who created the nightmare will throw Keynesianism into overdrive. They know nothing else -- the Austrian School of Economics is not taught in the U.S. The Fed was headed to QE(n) anyway but the street protests will only reinforce the need to "do something."
Gold and silver...
The anecdotal data with respect to worldwide silver and gold physical demand has never been more impressive and belies the paper price action. It is imperative to have your ear to the tracks of the physical market in order to assess where this market is heading. With your eyes fixed on the paper market you will be led astray. Asian demand is tremendous. Gold bars are changing hands at strong premiums to spot prices in Shanghai, Hong Kong and Vietnam. China, which installed its first gold vending ATM in Beijing several weeks ago, is rolling out an additional 2,000 ATM's.
The lack of understanding abounds. A decade into this powerful bull market the public remains largely ignorant about gold, as was illustrated recently in an amusing piece of TV "journalism" (it has unfortunately been removed by youtube) in which a reporter, attempting to explain recent gold weakness relative to U.S. Treasuries commented that gold is not 'backed' by anything, in contrast with Treasury debt which is backed by the full faith and credit of the United States (but which derives its entire historically decreasing real value from the accelerating rate at which it is printed). Such are the symptoms of a credit-centric culture that fails to grasp that gold is not credit and therefore doesn't require 'backing' to begin with. This inability to distinguish between a protective store of wealth and pieces of promissory paper bearing pictures of dead political leaders is always lost on the masses until it is too late for them. The public's nescience however creates continued buying power for precious metals. Bubbles do not occur without widespread public participation.
I've mentioned before how uncomfortable creepy it is to read anything from this bunch that is bullish on gold. Nevertheless, from Goldman Sachs' head gold trader Zak Dhabalia on 9/26: "[I]n the context of the macro markets I am not convinced at all the game is over for gold. In fact far from it. The rally in the dollar is not from a position of strength but more a reflection of panic about the risk of disorderly outcomes to fiscal and monetary policies in the face of poor political coordination...I firmly believe that as we have seen several times since 2008 these financial spec corrections for gold allow the bull run to reset positions and cleanup the market for the overall trend to remain intact and take prices higher later." ...and from JPMorgan on Thursday: Gold Is Going To $2150, And The Miners Are Way Undervalued
The inevitable taking to the streets has begun. That is a good thing. My biggest takeaway from my afternoon with the Occupiers though is that they remain part of the dependent class. Not one of the many protest signs I saw contained the word "liberty." This is where the aforementioned matter of the Occupiers being a highly educated group is also problematic. For their majority, having grown up in a country with rapidly escalating government and having spent their most impressionable years in government-run schools being fed platitudes about government as a positive force in their lives, it is not surprising that most of the Occupiers with whom I spoke hold to the belief that government has the ability to remedy precisely that which it facilitated. And so things must get considerably worse and disillusionment much wider spread before the Occupiers and the rest of the country are largely dispelled of that notion and learn they are facing more of the same by looking to a corrupt two-party political system (which is in reality, one central party) for solutions to what has gone wrong in their lives. When will this occur? Desperate governments hyper-inflate their currencies to nominally provide what their populaces demand, concurrently crushing living standards. History provides a road-map of what happens to countries whose currencies are ravaged by inflation. The OWS movement is a shot across the bow but unbeknown to the protesters and most of the country, it is a preamble to the next phase of pain that is to sweep the country and spread more widely to the ranks of the employed. The U.S. is about to receive its first experience with terrible inflation.
Not until the Fed has thoroughly destroyed the U.S. dollar will anything substantive change. The good news is that it won't be a particularly long wait.
All the best,
Jeff
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