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Having
spent the bulk of the 1980’s and 1990’s involved as a broker, in
institutional capital markets; I was privy to some of the most brilliant
financial thinkers of their time. One such thinker [a Ph. D. in mathematics]
was largely responsible for building the computer models – in the early
1980’s - that allowed the global banking concern he worked for to
“account for and book profits” on their global interest rate
derivatives positions [interest rate swaps and FRA’s]. This individual
also just happened to be the “co-book runner” or co-trader of one
of the world’s very largest interest rates derivatives books at the
time. While being of Polish extraction and he did speak in broken English;
this gentleman was well known in the market to be an utter genius.
Now, I’d
like to take you back in time to the summer of 1987. I was at lunch at a
fashionable eatery [there were 4 of us] with my boss, my derivatives trading
client and his workmate. Over small talk about the state of the economy and
the near term direction of interest rates, our Polish mathematician blurts
out, “I can see a day when the stock market [DOW] goes down four, five
or six hundred points – no problem.” Needless to say, the other
three of us sitting at the table nearly choked on our tongues. After
questioning our friend as to his rationale for such a bold statement [the DOW
was at 2,000 at the time] he explained that Portfolio Insurance was, in fact,
THE reason why the stock market would suffer a decline like he had just
described.
Understand that
Portfolio Insurance had been designed largely by mathematicians and, when
employed, resulted in computer generated equity trades that
“sold” ever increasing amounts of a user’s stock portfolio
as the index level [DOW] declined ostensibly as a hedge to
“protect” the value of what remained. Our Polish friend had
studied and modeled the assumptions that under laid not only the concept but
its execution.
What he found was
a critically flawed system – in widespread use – that in effect
turned the equity market into a tinder box with a short fuse. The faulty
assumption that belied Portfolio Insurance was that the stock market behaved
in a “linear fashion” and, in effect, incorrectly assumed that
there would “always” be a bid. All that was required to ignite
the whole shooting match was a spark. Needless to say, less than two months
later that spark appeared and the stock market dropped more than 500 points
[about 25 %] on that fateful Monday.
Amazingly,
virtually no players in mainstream finance ever saw the folly in a program
that they placed their complete faith in. The attempts to remedy the
shortcomings of Portfolio Insurance in the aftermath of the 1987 crash
involved the installation of “Circuit Breakers” –
which curb/cease computer assisted or all exchange trading after milestones
are reached on the up or downside on the relevant indexes. Perhaps of more
relevance, by virtue of Executive Order 12631, on March 18,
1988 - this led to the establishment of the Working Group on Financial
Markets or the Plunge Protection Team [PPT].
Depending on the
extent of official intervention, the remedial actions outlined above go a
great ways to remove the nonlinearity from financial markets. Ultimately,
markets that are regulated by omnipotent organizations like the Federal
Reserve and the Working Group, armed with the ability to print unlimited
amounts of cash out of thin air and buy and sell equity futures at their own
discretion – would seem to have the ability to keep a lid on, or at
least maintain financial markets with a semblance of order. Heck, we even recently learned,
“The President just delegated authority to John Negroponte that
allows him to exempt any publicly traded corporation that is working on
national defense issues or national security issues from the reporting
and accounting requirements under the 1934 Securities and Exchange Act. It's
basically the rules and regulations that require companies to keep accurate
records, accurate books, accurate accounting . . . and then disclose those
projects and that information to investors……” [RK
emphasis]
Make no mistake
folks, what is outlined above IS CATEGORICALLY NOT A DESCRIPTION OF FREE
MARKETS, or at least, not the kind of free markets that I was ever taught
about. The markets outlined above would make any devote Communist
“drunk with central planning envy”. It’s that simple.
So, on the
surface – everything might seem to be in place to allow the PPT to
perpetuate this illusion of Free Markets behind their Houdini-esque Central
Planning Charade. Funny thing; most of us have been taught to believe that
Central Planning is destined to failure. As Sir Alan Greenspan himself once said,
“Centrally planned economic systems, such as that which
existed in the Soviet Union, had great difficulty in creating wealth and
rising standards of living. In theory, and to a large extent in practice,
production and distribution were determined by specific instructions--often
in the form of state orders…..”
Has anyone
stopped to notice that the U.S. now creates more debt than wealth and living
standards are
now falling?
Lord, Is It Mine?
A rising price of
gold and silver has historically “blown the lid” off deceitful
practices of monetary authorities when they debased their currencies [printed
too much money]. Nowadays, in a world whose trade is dominated by
paper/derivative or proxy trade, the bulk of precious metals trade
customarily takes place on ‘futures exchanges’ like COMEX
[a division of NYMEX] or the
London Bullion Market Association [LBMA]. In such an environment, nefarious
activity like the suppression of bullion prices is possible since, HISTORICALLY,
the vast majority of trades are settled in fiat currency. This historic truth
is largely due to market participant’s acceptance to speculate on price
movements in the underlying commodity, trusting the value of the settlement
currency, the dollar, – instead of opting to take delivery and hold physical
metal – or real money.
We know that
physical gold and silver IS REAL MONEY because Section
10 of the Constitution for the United States of America
tells us this is so.
Oh Darling
If you have ever
seen The Wizard of Oz, you would be
aware that when Dorothy and friends go before the omnipotent and all powerful
Wizard; – it’s Dorothy’s dog, Toto, who ultimately reveals
the Wizard – hiding behind the black curtain – exposing his
trickery.
Well folks,
I’m going to bet all of my chips that the dog in this developing story
is going to end up being “PHYSICAL PRECIOUS METAL – GOLD AND
SILVER”. Unlike fiat money, which can be printed in “any
amount” out of thin air, physical gold and silver must be mined from
the earth. Recent bouts of reckless money printing - particularly on the part
of U.S. monetary authorities - have re-ignited not only private investment but
global Central Bank demand for physical
metal as a means to diversify their foreign reserve U.S. dollar holdings.
The trouble with
this development, for the status quo, is that the world already had/has a
structural supply/demand deficit where total supply [mine supply, which is
shrinking, and scrap gold] was already 1,500 tons per year below global
demand. This shortfall has been made up by dis-hoarding of Western Central
Bank vaulted gold stocks for at least the past 10 years.
Asylum?
The World Gold
Council publishes data suggesting that Central Bank’s vaulted stocks
are in the magnitude of 30.5 thousand tons of gold bullion. However, there are many who dispute this claim. But
it’s worthy of note that the World Gold Council either dismisses or
suggests investment demand is of little or no consequence as their latest
report [Q1-06] shows:
Where
is Central Bank Buying Recorded?
You see folks,
the World Gold Council – self professed as the world’s authority
on gold - has Identifiable Investment demand BARELY RISING in
2005 and actually declining year over year in Q1/06 despite this UBS report:
Russia leading global 'stealth demand' for gold
By Ambrose Evans-Pritchard (Filed: 05/06/2006)
The world's big money brigade is snapping up gold bullion at
eight times the rate originally thought, according to a report by UBS, the
world's biggest gold trader.
The huge sums entering precious metals below the radar are likely
to help to put a floor under the gold price after the dramatic fall of $112
an ounce in late May - the sharpest correction since the bull market began
five years ago………….
THAT WAS 8 X THE
RATE ORIGINALLY THOUGHT!!!! The World Gold Council reporting is COMPLETELY
INCONSISTENT with IDENTIFIABLE, additional, reliable third party reporting,
“To forestall an
effort by the West to seize Iranian assets in Europe, the Iranian leadership
decided last fall to begin a massive, secret repatriation of its
international currency reserves, according to Central Bank of Iran documents.
The documents were
obtained by an Iranian opposition group and shared with Newsmax.
The documents detail
eight shipments in chartered jumbo jets from Zurich's Kloten airport. The
shipments, from October through late November, brought 250 tons of gold
bullion from the vaults of Swiss banks to Tehran. “
The
World Gold Council is so brash; in a crass attempt to absolve themselves of
this blatant misreporting, they even go so far as to include in notes to the
table above,
“Source: Tonnage
data are GFMS Ltd. Value data are WGC calculations based on GFMS data. 1.
Identifiable end-use consumption excluding central banks.”
Exclude
hundreds of tons of Central Bank Buying from identifiable end demand? This
is OUTRAGEOUS! But is gets even worse! The reality folks; blatant
efforts were made to actually cut Iran off from buying more gold, when it was announced on Jan. 22, 2006
“Swiss banking giant UBS AG said Sunday it has stopped
doing business with Iran because of the company's economic and risk analysis
of the situation in the country. UBS will no longer deal with individuals, companies or state
institutions such as Iran's central bank, said company spokesman Serge
Steiner. A similar policy is also being implemented in the case of Syria, he
said……”
Crime
of the Century?
How
can ANYONE accept this kind of DECEPTIVE misreporting from the
World Gold Council? This article, ALONE, readily identifies at least 250
TONS of [NEW] gold bullion purchases in Q4/05 while the world’s
“supposed” authority on gold says “net identifiable
investment” was 154 tons? Claims of ignorance to this development could
represent nothing short of Enron-esque effrontery on the part of the World
Gold Council. What a sham! Actually, I’d really like to know why they
bother publishing any numbers at all?
This
blatant misreporting sheds light on the true nature of the tricks being
played on an unsuspecting investing public where demand [and by extension the
amount left in the vaults] for physical gold is and has been concerned. Armed
with the knowledge outlined above, GATA has long maintained that the reported
tonnage of gold held in Central Bank’s vaults is much less than
officially reported – with much of it being already lent out or
swapped. In fact, in April 2006 the IMF published
a paper, admitting that some of Central Bank hoards of
monetary gold have in fact been “double counted”. Not a word from
the World Gold Council on that, eh?
So
folks, despite the recent plunge in the price of gold, it is really quite
apparent that physical demand is stronger than ever. The games that are being
played are largely being done in the paper [futures] market with noble
assistance from “wolves in sheep’s clothing” shills like
the World Gold Council. These absurdities will CATEGORICALLY come to an abrupt
end when the quickly dwindling physical gold is gone.
Breakfast
In America or Crisis, What Crisis?
If
recent GATA suspicions that 450 – 525 tons of physical sovereign [U.S.
gold on deposit at the I.M.F.] gold were mobilized with the Bank of England acting
as sales agent to “bomb” the price of gold from its recent +700
dollar high, these games will not be played for much longer folks – you
see, 500 ton caches of gold bullion are already rare birds and becoming more
endangered every day.
I
would like to add that if the above is true it also says much to the
technicians out there who have been all too quick to claim that gold [and the
metals complex] was due for such a correction. Metals prices have advanced
due to the recklessness [to much printing] of monetary authorities – PERIOD.
Claims that ANY MODEL accurately predicted the expulsion of an
unexpected, illegal 500 ton dump of gold onto the market are baseless and
without merit. If American I.M.F. gold was indeed mobilized, it would also
appear that the requisite Congressional approval to do so was not sought.
What a mess [or perhaps Constitutional Crisis would be more appropriate]!
If the
world’s gold producers have any interest, whatsoever, in promoting
their product – they need to immediately sack The World Gold Council as
their “advocate” for gold. THEIR CREDIBILITY IS LESS THAN
ZERO. With friends like the World Gold Council, the world’s gold
producers certainly do not need any more enemies.
I’ve
got a funny feeling that gold price suppression will ultimately have an end
which will be much more financially devastating than Portfolio Insurance back
in 1987. It’s a simple case of the underlying assumptions [that there
will always be enough sovereign physical gold to sell] are FALSE.
Seller beware!
Rob Kirby
KirbyAnalytics.com
All
articles by Rob Kirby
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