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Casual Conversations
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 CATEGOROCALLY 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
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