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Setting the
Scene
This article builds on earlier essays by the writer
based on a similar theme. However, as the reader will see, this gold boom
cycle will be like none before it, and, as is often the case in human
affairs, events of the past, whilst similar in outline, may differ
significantly from presently unfolding events. To quote Winston Churchill,
they are "variants on a familiar theme". That theme is determined
by repetition of man's own inherent weaknesses: lust, greed and desire for
control exercised through power and his preoccupation with the here and now. Technology
merely a par, albeit a very important one, of the ever changing and evolving
environment within which man reenacts his greater
deeds or, more often, his follies.
It should now be apparent to all readers of these
pages that we are in the midst of the largest FIAT money experiment ever
witnessed by an entire order of magnitude, and the first FIAT money exercise
to be put to the test on a truly global scale. Hitherto, the political, economic
and technological environment was not conducive to enabling such an
incredible scheme to be successfully put into effect. To enable this required
the presence of one hyper-economic power that also controlled a global
currency and the velocity of capital movements made possible through modern
communications technology. Another critical factor essential to enabling FIAT
to be expanded without control was the destruction of the gold standard on
which the value of all issued paper money was formerly based, and the strict
financial discipline this exerted throughout the global financial system. It
was, therefore, vital to the promulgators of FIAT that gold was no longer
seen as a monetary instrument by the general public or, indeed, governments. The
reader may be wondering why elected democracies would wish to support this
vast and virtually uncontrolled expansion of paper and digital money, and the
attendant explosion in inflation and associated wealth destruction of saver's
funds, and for what purpose this is all intended. The reasons, as this
article proposes, are as awesome as the scheme itself.
The United
States has, since World War 2, dominated
the world economy. Essential to this dominance was the acceptance, by proxy,
of the US dollar as a global currency in which all commodities are traded and
intrabank transactions settled. In a post war
world, where financial stability was essential to reconstruction of a
shattered Europe and Far East, this
situation worked to everyone's mutual advantage. However, it enabled
successive US
administrations incredible global, political and economic leverage hitherto
not given to any one nation state. Furthermore, through this global financial
dominance and influence, the US Federal Reserve was able to influence the entire
world economy and, dare one say, manipulate it to its own advantage, by
either the issuance of vast amounts of new capital or by putting on the
brakes through interest rate increases. Hence, the former boom and bust
cycles which became as much a lynchpin of US global economic strategy and
their ubiquitous and ever expanding military presence. The US finally
cut all ties between the dollar and gold under the Nixon administration in
1972. This ushered in an explosion of FIAT, inflation and a surge in the gold
price to its highest ever price of US$ 850 per troy ounce. This single event
convinced the central bankers that gold must, by some means, be controlled
and, if necessary, suppressed, otherwise it posed a major threat to their
plans to embark on their own version of interstellar space's creation in the
"Big Bang" with colossal expansion of credit and digital money. But,
what end was this scheme designed to achieve?
The Problem
As Bill Murphy and the GATA organization has
successfully demonstrated, the world gold market has been the subject of
intense manipulation against all the precepts of free markets. The importance
of manipulating the gold price centers on two key
issues, namely: the importance of protecting the huge carry trade pyramiding
profits upon the leasing of physical gold, at very low interest rates, at its
foundation; secondly, the removal of the notion of gold as a monetary
instrument was central to the creation of the digital money system under
which we now live. This being the greatest confidence trick ever played upon
a largely unwitting human race. The eventual social and political costs of
this scheme are barely worth contemplating, so wide ranging are the
implications.
As though to emphasize the first fact, the UK
Government, amidst much hullabaloo and extreme obfuscation, purportedly centered on the proposed UN debt relief program, decided,
in May 1999, to carry out a phased sell off of 50% of the UK's gold reserve,
amounting to 415 tonnes, in the first sale of its type since the Napoleonic
wars, with the astonishing timing of selling at the very bottom of the gold
market. The sale lost the UK
taxpayers in excess of 2 billion US dollars - a fact suitably glossed over by
the Chancellor of the Exchequer, Gordon Brown and the Prime Minister, Tony
Blair. The real reason for the gold sale was the saving of some very
significant and highly influential figures at the top of the world banking
system and their elaborate carry trade and gold based derivatives and tied
hedging commitments. The nonsensical story about UN debt relief was nothing
other than an elaborate smokescreen that simply serves to underscore the
enormity of the lies told by the world's so called "leaders". It
also clearly highlights who really call the shots behind the scenes. World
leaders are little other than cosmetic marionettes dancing to tunes played
behind the managed media curtain.
Another immense smokescreen, exposed by Bill Murphy
and Frank Veneroso, centers
on the supposed physical gold reserves held by the world's central banks. As Veneroso has so well documented, the Central Banks have
an estimated 10 to 15,000 tonnes of physical gold and not the 31,000 tonnes
they have reported. In an accounting "sleight of hand", Central
Banks routinely report "gold and gold receivables" or "gold
and gold deposits" as one item. This hides the fact that swapped gold is
recorded as an asset when a legal change of ownership has occurred. This
double counting has had the beneficial effect of inflating reserves held by
Central banks. This fortuitous double accounting serves to mask the extent of
the gold based carry trade and derivatives markets and the obvious conspiracy
to cap the gold price.
This is only the tip of a veritable continent sized
iceberg of problems manifesting in today's financial and capital markets. More
than 90% of the complex interlinked and highly leveraged hedge funds and
derivatives markets, which are so much arcane science to the uninitiated,
carry enormous risks should interest rates increase much above current
levels.
The second issue concerns FIAT currencies and the
immense confidence trick attendant in their actual value and continued
existence. Everyone is fully aware that all paper currency has devalued to a
mere 1% of its value a century ago. Inflation has been underway and
accelerating since 1913 and the creation of the US Federal Reserve Bank. However,
this accelerated with the destruction of the world gold standard. Two key
events caused the issuance of digital money to go through two major periods
of expansion. The first, from 1982 to 1992, experienced a "modest"
8% year-on-year expansion in the money supply. However, from 1992 to 2002
expansion moved into overdrive with the deregulation of global markets with a
year-on-year expansion of more than 12%. Since the 2002 post 9/11 crash, the
expansion of the money supply has been running at greater than 15% with the
lowest interest rates seen since in 45 years. As though to underscore the
extreme rate of expansion the Fed has stopped publishing M3 money supply
figures. This highly insidious move is little more than an attempt to mask
the facts and raises serious questions about the honesty, integrity and
objectives of the system we now live under.
The CPI figure has so little basis in factual
reality that it serves only to underscore the age old adage "there are
lies, damn lies and statistics". Indeed, this figure is little more than
a piece of "voodoo economics" designed to fool the unwitting populace
that inflation is only a third or quarter of what it really is. The
objectives are merely to put intense downward pressure on labor
market wage settlements. Furthermore, besides its political value, the impact
of the CPI figure has complex ramifications throughout the financial markets
and pension funds markets. Another bogus statistic is the unemployment
figure. This is another highly tampered with set of figures designed to give
a politically important "feel good factor" and disguise underlying
unemployment and, more importantly, the actual structure of the labor market and mask major underlying problems by
keeping them out of the political debate.
The following are a shortlist of some of the major
problems facing a debt saturated world, in particular, the world's largest
economy, the USA:
1.
The US Government deficit now exceeds US$8 trillion.
The ceiling for the deficit has recently been raised again by Congress;
2.
The US
needs to receive funding at the rate of US$65 bn./month
or more;
3.
The trade deficit is now running at an "eye
popping" US$730 bn. per annum or 6.7% of GDP;
4.
The derivatives and hedge fund markets top US$240
trillion;
5.
The US
has reached a level of debt saturation hitherto thought unimaginable and
unsustainable, comprising, at its heart, mountainous mortgages and pyramiding
credit card debt. More and more Americans have burdened themselves with
maximum mortgages taken out with the perception of a real estate market set
on an ever upwards trajectory. Most of these mortgages are at the limit that
the mortgagee can support, and this sustained by ever more complex and
financially dubious mortgage products increasingly designed to underwrite ARM
(Adjustable Rate Mortgages) mortgages. This is little other than a horrifying
scenario based on a "colossal leap of faith" in the persistence of
low interest rates and economic naivety by the population at large;
6.
The Feds policy of total accommodation, with
interest rates falling to 1% in 2001 to 2002, to avert the inevitable major
bond and stock market crash and all it implied for the world economy, was the
signal for the surge in commodity prices many of which have more than doubled
in price. Amongst the most prominent is the rise in the oil price from US$22
to US$65, but others, to name but a few, include: platinum, gold, silver,
nickel, copper, lead, zinc, soy, sugar, coffee and cocoa. Most of these
commodities are currently trading at increases of from 120% to 300% above
2002 prices. However, have all been reliably told that headline inflation
rates are below 2.5%. Perhaps one needs to look at
the salary and benefit increases of executives in the World's leading
companies to see what they have been awarding themselves to determine what
they know to be the real inflation rate. This, you will find, is running at
between 12% to 15% per annum, and a lot more if
other perks such as generous stock options and severance packages are
factored into the equation. So much
for the CPI;
7.
Finally, but by no means least, we have "the
forever war" on terrorism. Congress has approved the largest ever
increase of some 40% in the Defense Budget to a
mind boggling US$450 billion. This means that the US spends more than all the other
countries in the world combined on its military. One may wonder what such
expenditure might achieve if even a fraction of it were directed to such
things as: US infrastructure including roads, railways, power stations,
hospitals, and construction of better schools; or, medical research;
development of new sources of energy; reducing the effects of pollution in
the US; or if some was directed to alleviate world poverty and assist
developing countries? The current Iraq war is little other than a
debacle that has brought untold misery. Even worse, the ugly inheritance of
Winston Churchill's policies has come back to haunt the citizens of Iraq with
a fracticidal civil war now underway which is
engulfing Sunni Muslims, Shi'ite Muslims and Kurds.
In a nightmarish scenario, this war could well drag in Kuwait, Iran,
Turkey, Jordan and Saudi Arabia. Neither the US nor the UK
has a clear exit strategy for Iraq.
In fact, they are linked together in a mess that neither can extricate
themselves from. The full consequences of this immense policy failure will
become apparent over the coming months and years. Long will the Allies live
to rue the day the got involved in Iraq. History will not judge Messrs Bush and Blair kindly.
Eventually, the truth will out.
The Great Crash
of 2007 - 2010 and the destruction of World FIAT
Almost all analysts have suspected that a major
correction or crash is coming, from Morgan Stanley's Chief Economist, Stephen
Roach, to Prudent Bear's Doug Noland. However, people have given up calling
the timing of the crash because so many have been wrong-footed or dumbfounded
by the action of the Fed and the markets. However, this writer feels
confident enough to call the timing of the crash and presents two long term
charts of the DJIA (Dow Jones Industrial Average) which measures the top 30
US stocks and the technically more significant S&P 500 (Standard and
Poor's 500 largest US traded stocks).
To gain a real perspective of the situation
developing, the writer has looked at the past 35 years of trading activity. Superimposed
on these charts are the 50, 250 and 500 day moving averages. Several important
features are apparent on these charts, as follows:
1.
On the long-term charts it is apparent that the
current bull market in the DJIA is complex but the following features are
obvious:
2.
The current bull market is the largest by an entire
order of magnitude from any preceding bull market;
3.
The 2001 to 2006 double bull market is actually
forming the largest technical 'double top formation' ever witnessed in the
history of the equities markets. This market includes the Phase 1 run up from
1982 to 1992 but shows major acceleration following the deregulation of
markets in 1995. The top, at 11,700 points, came in 2001 forming the immense
head of what should have been the all-time classic "head and
shoulders" formation. However, given such a clear technical picture and
economic landscape the Fed aggressively dropped interest rates to the lowest
level in 45 years to create a strong rally off the right shoulder of the head
and shoulders formation thus producing the world's largest ever technical
double top formation. Now, with inflation in commodities markets running an
almost out of control bull market, and debt saturation close to total
throughout the entire world, the scene is set for the economic and m athematical denouement; With interest rates set to rise
around the world and marginal FIAT currencies such as the Icelandic Krona and the New Zealand dollar in freefall against the
US dollar, the dominoes have started their collapse. The next currency to
fall will be the Australian dollar which is already in steady decline and
then the Canadian dollar and Sterling
and the Euro. This will stimulate competitive interest rate rises to halt the
collapse of all currencies against the "world commodity currency",
the US dollar. As the US
is forced to carry on raising rates, the bond market will steadily fall, and
then implode taking the US dollar, the equities markets and the dollar with
it in the greatest stock and bond market crash of all time.
The timing of this crash can be derived by examining
the 50, 250 and 500 day moving averages (MA) on the charts presented as
Figures 1 and 2. It can be seen on Figure 1, of the DJIA, that the 250 day MA
has now formed an unusual plateau at exactly 10,000 on the DJIA. This is
diverging from the 50 day MA but closing with the still rising, due to lag,
500 day MA . This it has never done in the charts'
35 year history. On Figure 2, the 250 day has already crossed the 500 day MA
in the S&P 500 index. However, the key inflexion point will be when the
50 day MA crosses the 500 day MA which should occur from 8 to 12 months from
now. The 500 day MA will then complete the other side of a perfect poisson distribution curve; i.e., the downside. This will
usher in the crash which should be underway from October - December 2006 and
gather momentum into 2007 amidst a climate of rising interest rates,
political and economic uncertainty, debt saturation, gross economic
distortion and imbalances, and war.
Just how far the collapse will go is hard to
predict. However, from the technical charts, a reduction in the DJIA and
S&P 500 to somewhere around 10% of today's levels looks
probable.
From the foregoing, those fortunate enough to own
their own homes and other core assets, and possess a mix of quality gold mine
stocks and physical gold will be amongst the few who survive this financial
equivalent of a holocaust. The current boom in the gold price is not a boom
in real terms. Gold has in fact underperformed most other commodities in
relative terms and moreover in terms of general asset inflation. The gold
price has barely kept pace with inflation, until very recently, over the
entire period from 1999 (when it was already seriously depreciated), due to
excessive manipulation by the Commercials. Indeed, according to Russia's
Central Bank, gold should have been at US$750 in 2004, to have kept pace with
inflation. This writer firmly believes even this is a substantial
understatement. A recent report by Chevreaux's Paul
Myrchreest has raised their mid-cycle gold price to
US$ 900. This writer believes the venerable doyen of the markets, Richard
Russell, is closer to the mark with his estimate of the gold price peaking at
US$3,000. However, all this depends upon just how far the FIAT currencies
collapse. There is definitely scope for a complete implosion of all the
world's major currencies to levels reminiscent of the Weimar Republic's
Mark where German banknotes were overprinted first in multiples of millions
of marks and then billions. Gold lives on to see its final revenge on
mankind's incapability to remain honest in his handling of money and other
peoples hard-earned savings.
Finally, of one thing we can be sure, the coming
rise of gold, silver and platinum and puncturing of the colossal credit -
debt balloon, will usher in an entirely different world in which the economic
and social - political landscape will have changed forever. We are witnessing
one of history's great turning points. Let's hope the changes wrought will be
positive!
June 1, 2006
Nigel H. Maund
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