goldmap

ILL Wind - 6/21/10

 

“The collapse of the financial system as we know it is real, and the crisis is far from over...Indeed, we have just entered Act II of the drama.” - George Soros, 6/10/10

“I don’t fully understand movements in the gold price.”  - Ben Bernanke, Chairman U.S. Federal Reserve 6/9/10

"So ill wind, blow away
Let me rest today
You’re blowin’ me no good" 

- Ted Koehler, 1934

  

Dear All,

John Napier, chairman of British insurer RSA has lashed out at Barack Obama for engaging in what he terms a "double standard" in his execration of British based BP over the Deepwater Horizon oil rig disaster, contrasting it with the world reaction to continuing revelations of the U.S. financial industry's exportation of toxic financial products to western economies: SkyNews: 'Anti-British' Obama Attacked Over BP

"If you compare the damage inflicted on the economies of the western world by polluted securities from the irresponsible, unchecked greed and avarice of leading USA international banks, there has not been the same personalized response in or from countries beyond the US. Perhaps a case of double standards?" 

The man's got a point.

To wildlife and the oceans there is no comparison but It is difficult to see how the final tally of the derivative sewage will prove less toxic and devastating than the BP spill insofar as the damage ultimately inflicted on humanity.  In Vienna recently George Soros referred to the non-ending growth of credit default swaps as a "license to kill."

A former law school teacher, Barack Obama ran for president without having had any executive experience in either the private or public sector, although his presidential campaign often cited his work as a "community organizer."   Residents of the Gulf states are now getting a first-hand look at those organizational skills.  He is an academic who spent too much time in the faculty lounge.  U.S.News & WORLD REPORT: World Sees Obama as Incompetent and Amateur

I do not mean to single Obama out.  I'm a libertarian and chose not to vote in the last presidential election.  My point is simply that just as the culture of corruption and government ineptitude did not begin with his administration, neither did it change with his arrival despite campaign promises of -- not just change -- but most particularly the sort of change one could believe in.  It was an open secret that the Minerals Management Service was a corrupt and shady agency controlled by the oil industry that featured among other things, cocaine and sex parties between 'Regulator' and 'Regulatee' (or if you prefer insofar as the sex parties are concerned, 'Oiler' and 'Oilee').  Obama paid lip service to cleaning the agency up.  Then in late March and to the chagrin of environmentalists, Obama announced that he had decided to expand offshore oil drilling and effectively as well, the authority of the MMS. NYTImes, 3/31/10: Obama Oil Drilling Plan Draws Critics  Three weeks later the Deepwater Horizon rig blew up. 

Through the Interior Department the MMS leased offshore drilling rights to BP and others without requiring any financial bonding and with virtually no oversight free of corrupt practices.  Predictably, post-disaster and with floodlights now on him Obama announced an overhaul of the MMS.  Predictably as well, with the horse now fully out of the barn there will be an overreaction in regulation and restrictions that serve no purpose.  This is why we take our shoes off in airports.  The only way to make government more responsive and responsible is to give it less responsibility.

A near century old piece of protectionist legislation is hindering the cleanup operation in the Gulf of Mexico.  The most technologically advanced oil clean-up equipment available is not currently in the Gulf -- it is foreign built and in places such as Saudi Arabia, although it has been offered to the U.S.  The Merchant Marine Act of 1920 (also known as the Jones Act) however requires all ships working in U.S. waters to be built in America.  President Bush used his presidential emergency authority to suspend the Jones Act in the aftermath of Hurricane Katrina.  President Obama however has thus far resisted offending the unions by suspending the Jones Act which is depriving the Gulf of the most state-of-the-art clean-up equipment available.

 

You'll recall a New York Times front page propaganda piece that appeared on Aug. 30th:  'As Banks Repay Bailout Money, U.S. Sees a Profit.'    In my post of 9/4/09  'China Stares Down Derivatives'  I called this utter BS.  Here's how things have worked out since: CNBC: More Than 90 Banks Miss TARP Payments

 

If I ran the world it would it would look pretty much like the one Nassim Teleb describes.   NewYorkerCurrents: Risk and Robustness (Click on the tab "New Yorker Currents" to access the video).  Taleb's analysis is spot on.   Note his remarks on how business schools teach all the wrong things about finance.

 

Lexapro Alert:  Depressing and quite mind-boggling, really.   NYTimes: Budgetary sleight-of-hand 

 

On to gold...

Refer to this on days when the central banks and bullion banks slam silver and gold:  John Embry: 17 Reasons to Own Gold

Financial firms prefer to screw their clients by relying on a) the tried and familiar, and b) that which offers the widest spreads,  highest fees and commissions.  Gold and silver run antithetical to those interests. The increasing awareness and interest by the public in precious metals however is forcing Wall Street -- ever so reluctantly -- to allocate investor capital to the sector, although it is invariably to the quasi-fraudulent (and physical demand diverting) ETF's

Keep your ear to the tracks and not in the direction of Wall Street pundits.  The big picture is what matters. Here is the trend:

Businessweek.com: Medvedev Pushes Ruble Reserve Currency to Cut Dollar Dominance 

EmeratesBusiness: WGC more than doubles estimate of Saudi gold hoard 

The trend is only going to accelerate.  The fiat currency game is over.  Do not for one minute believe that Mr. Bernanke, as quoted at the top of this post does not fully understand what the movement in the gold price means. 

What has happened is not reversible.  What is coming is not good.  This is not a mere financial crisis.  This is the breakdown of the western currencies. 

There is going to be panic buying of gold and silver as what has been laid out in the archives of this blog continues to come to pass.  In the interim there is simply going to be a marching higher of the gold and silver price with interludes of suppression.  The gold and silver stocks are remarkably cheap.  Despite their gains,  given gold's new record high they are practically comatose. Their coming moves will amaze.  Don't trade.  Do not take profits.  Stay put for the foreseeable future.

 

All the best,

Jeff

Rendezvous with Destiny! - 6/7/10

 

"Everything is being manipulated by the government" - Investor Seth Klarman, President Baupost Group, 5/18/10

 

Dear All,

Friday's dreadful jobs report is consistent with the deepest annual decline in the money supply (M3) in seventy years.  The private sector is a horror and contracting.  Even the census worker hirings -- essentially the only jobs created under the report -- were largely phony (see link below). This chart on the steepness of the employment drop-off is staggering.  There is no time period to compare it to in the post-WW 2 era.  This is in-spite of what is arguably the most massive liquidity injection into an economy in all of recorded time. 

 

The White House tried spinning the report as reflective of a positive trend.  Christina Romer, President Obama's irritating economic adviser also described the President as being very "concerned" about deficits while she at the same time endorsed yet another wasteful stimulus package.  When Romer was questioned about the contradiction she stated it would be "short-sighted" not to get behind a new stimulus injection.  Short sighted?   In the United States the virtue of sacrifice has apparently become "short-sighted."   Some would suggest that for the sake of the deficits -- about which the President expresses his "concern" -- for the sake of their children and future generations who will be left with the legacy of that much more debt,  Americans would be doing the wise and noble thing by bearing some pain today and not going for yet another quick and dubious deficit-inducing fix.  The White House has now declared such suggestions to be "short sighted."  I'm sorry but these people are sociopaths.

Brooksley Born, the former CFTC chair who was stonewalled by Robert Rubin, Alan Greenspan and Lawrence Summers in her calls for transparency and oversight of derivatives PBS FRONTLINE: "The Warning", had the opportunity to question Warren Buffet as he testified before the Financial Crisis Inquiry Commission.  This exchange sums it up:

BORN:  “Is the derivatives market still a time bomb ticking away?”

BUFFET: “I would say so.”

A reader, referring to JPMorgan Chase's monstrous short position in silver asks:   

  

>>I can't figure out how JPM will get out of this, unless I'm getting erroneous information on the size of their short position.<

  

My response:

 

>>JP Morgan and the Fed are the same thing...don't you see?  The notional value of JPMorgan's derivative book exceeds the GDP of the entire world.  They don't have to get out of any position because it is something beyond 'too big to fail.'   Effectively JPM, backstopped by the Fed gets to print its own currency.   It has no problem because there is no possibility of it's failure.  This is moral hazard in extremis.  Its those of us who don't have the advantage of being able to print currency to pay for things that have the aggregate problem in this highly lopsided zero sum game.  The few who understand this are hedging against this by trading their dollars for gold and silver.  JPMorgan/Fed will print it's way out of the problem which then transfers the problem to the rest of the world's dollar counter-parties.  Bringing down the value of their derivative liabilities through dollar debasement is how they do it.  There is no other option.  But understand that the entire problem goes away for them and is transferred to you.<<

 

 

 

I received a lot of questions on the following hit-piece which appeared in the Wall Street Journal WSJ: Bret Arends - Why I Don't Trust Gold and was in the midst of penning a response to this financial illiteracy when Chris Powell of GATA distributed the following two excellent responses. The only thing I will add is that the appearance of nonsense such as this in the main stream media is actually bullish for gold.  Be concerned when they sing gold's praises.

 

Robert Blumen: The Wall Street Journal Does Not Understand How the Gold Price Is Formed

 

Gary North: The Wall Street Journal's War On Gold

 

Mr. Arends typifies so many who write about gold with great pretense yet little education or understanding.   Contrast this with what a very educated Ben Davies has to say on the subject. cnbc.com: Ben Davies, CEO of Hinde Capital

 

 

 

And now two voices from ivory towers...

 

NYTimes: Paul Krugman - We're Not Greece   No we're not -- actually we're much worse.  The nobel laureate demonstrates his inability to view the world absent a partisan bias as well as his apparent continuing fondness for hallucinogens, to wit 

 

"...the fact [is] that we have a clear path to economic recovery, while Greece doesn’t"

  

Here Jeffrey Sachs, smug economist, tenured Columbia University professor and "advisor to the IMF and World Bank" (How reassuring.) is dressed down by the blunt and street-wise Hugh Hendry.  Intellectually stubborn and emblematic of the failed Keynesian mindset, Sachs condescendingly seeks to reassure that the academics have it all figured out and we should simply relax.  Thank you, Jeffrey.  Now take your head out of your academic crotch, open the window and enter the world of reality.  It is precisely Sachs' ilk that has helped create the debacle we find ourselves confronting.  youtube.com: Hugh Hendry: "I Would Recommend You Panic"

 

 

 

Warning...Lexapro  Alert: NYPost: The Census Circus

 

 

On to gold...

 

Increasingly we are hearing that gold is in a bubble.  Get used to it because you'll be hearing this for the next several years as gold continues to move significantly higher in price. We are in the midst of the greatest currency bubble in history yet we hear that gold is bubbling.   Never mind the extent of gold's rise from its low -- that alone does not constitute a bubble.  A bubble is not a simplistic function of the degree to which an asset has risen in price.  A bubble requires the price of an asset to drastically exceed it's value.  The price of gold today is drastically below its value.  Time will prove this.  Few understand the proper metrics by which to value gold.

 

How long do you think governments can continue bailing out a failed credit and banking system using newly created currency?   The major western currencies including the U.S. dollar are going to be "reorganized" and those holding assets denominated therein will be punished, particularly owners of debt instruments.  Holders of "safe" U.S. Treasuries and "quality" corporate debt will lose much of their real capital.

 

Gold is and always has been largely a waiting game.  Price suppression by central banks and bullion banks continues in full force but they will not prevent gold from going to its natural price. Actually, the defeat of the suppressors has been playing out in slow motion for a decade, resulting in gold moving from $250 per ounce, but its going to accelerate and it will be slow motion no more.  Many gold investors are concerned that the gold price can be suppressed indefinitely and that the Fed and U.S. government will never allow gold to trade freely.  While they may have the will, the U.S. and the Fed do not have the capital necessary to do so.   They cannot perpetually settle physical claims for gold using printed fiat.  Gold cannot be printed and the U.S. does not have sufficient physical gold to deliver. 

 

This tension between the growing number of short paper contracts on the future exchanges and the escalating desire for delivery of physical gold is setting up a great showdown. Off the exchanges (as has been reported in recent weeks to be taking place in Athens) physical gold is trading at premiums to the London and New York spot paper prices. Currently delivery demand is not sufficient to overpower the shorts but it will get there and then its game over.  This epic battle between real and pretend is playing out and in the end gold will have it's Rendezvous with Destiny! (hyperbole intended).

 

Stick around for the next few years and watch gold levitate.  It'll be quite a show!

 

There's a gold rush coming.  Fasten your seat-belts.

 

All the best,

 

Jeff