Paul Joseph Goebbels was the Minister of Propaganda in Nazi Germany from
1933 to 1945. He once said that if you tell a big enough lie and keep
repeating it, people eventually come to believe it.
Today's governments together with the mainstream media seems to have taken
Goebbels' comment to heart. They omit facts and distort the truth to suit
their agenda, while a completely different point of view is presented by
highly qualified, intelligent analysts through blogs, websites and Internet
articles. This
article by Raul Ilargi Meijer gives an excellent overview of the
propaganda disseminated by the press today.
For investors, it is up to each individual to carefully examine the
arguments from both sides and come to his or her own conclusion about what is
reality and what is propaganda. This knowledge will allow them to make the
right decisions and prosper, and avoid painful mistakes in the coming years.
In the area of economics and finance, the manipulation, distortion and
outright lies should be obvious to anyone who cares to do even the slightest
amount of research outside of the normal channels. At the root of the coming
economic disaster is Keynesian economic philosophy of increasing debt
implemented by Western central banks. The experiment that started in 1933,
and peaked in 1971 with the abandonment of gold convertibility, has gone into
the hyperbolic stage, with Japan being the poster child of an economic system
gone mad.
Once the world's second-largest economy, with land in Tokyo selling by the
square inch and the Nikkei Index peaking at 38,957 in December 1989, today
Japan has the world's highest debt-to-GDP of about 230%, and the Nikkei is
still down about 55% after 25 years. David Stockman, former Assistant
Treasury Secretary, does an excellent job of summarizing Japan's gruesome
statistics in this article: 'The
Keynesian End Game Crystalizes In Japan's Monetary Madness'.
Japan is the canary in the coalmine, and should be closely monitored by
investors all over the world, because the same thing is already happening in
South America, Europe and Asia. Even though the US appears to be in recovery
following the near collapse of the financial system in 2008, a closer
examination of the facts leads to a considerably different conclusion. Wall Street
was euphoric at the reported "5% growth in third quarter US GDP,"
and the DOW surpassed 18,000 on this news. John Williams, however, presents a
different, more accurate view, on his website.
Mike Shedlock has written an article on how
GDP is distorted by the Bureau of Economic Analysis
Peter Schiff also covers
the manipulation.
Apart from examining statistics, a simple look at some of the obvious
realities brings the official numbers into question. When one considers that,
while the official unemployment rate is supposedly 5%, when you use the
methodology established in the late 1980s the real unemployment rate is
approximately 23%. This is confirmed by the declining labour participation
rate of 63%, the lowest in thirty seven years. Real wages have seen no
improvement, and are at the lowest level in thirty six years. Food stamp
usage is at a record high, with nearly half the US population dependent on
some form of government handout. This reality means that recovery is an
illusion (at best), or a lie (at worst). Aldous Huxley, the writer and
philosopher, said, "Facts do not cease to exist because they are
ignored." Jim Quinn quotes Huxley in his article "Should You
Believe What They Tell You or What You See?," which provides an
excellent explanation of the many distortions and lies the mainstream media
is asking us to believe.
Nowhere is the propaganda and distortion of economic reality more
pervasive than in the negative media barrage against gold. The biased
commentary, rife with misrepresentations and purposeful omissions, is spun by
the media almost on a daily basis. No other asset class or investment
category is subject to this level of bias and misrepresentation. Anyone who
cares to look outside of the mainstream media propaganda will conclude that
the drop in gold prices was clearly an orchestrated event, first in 2011 with
a one day drop of 7.2%, and then in April 2013 for an 8.5% drop. In the early
morning hours of January 6th, 2014, 12,000 gold contracts representing $1.5
billion of naked short selling was forced onto the paper gold COMEX market.
Without speculating about who did it or why, it should be obvious that no
trader would sell that much gold into the market at one time, effectively minimizing
their sales proceeds. Dr. Paul Craig Roberts provides a detailed overview in "Rigged
Gold Price Distorts Perception of Economic Reality."
What most observers miss is the connection between the paper COMEX markets
and the exchange-traded fund, GLD. Unless you have read the original 2005
Prospectus and the Authorized Participant Agreement, it is impossible to
understand how GLD, and in fact all ETFs, work. ETFs are not like open-end
mutual funds with low management fees. They are designed as tracking vehicles
that use assets borrowed by Authorized Participants in exchange for ETF
shares that are sold to the public, while the Authorized Participants keep all
the proceeds of sale. It is not about earning management fees. This
article by David Ranson details some of the concerns with GLD.
When the gold price declines due to orchestrated naked shorting on the
COMEX, redemption requests increase at the GLD. The Authorized Participants,
likely the same entities that naked shorted gold on the COMEX exchange,
redeem ETF shares for the borrowed physical gold. Either the gold is returned
to the central banks from which it was borrowed, or it is sold to China via
their sovereign wealth fund after being refined in Switzerland.
When China eventually announces that it now holds 5,000 to 6,000 tonnes of
gold, the quants among us will have to figure out where that gold came from,
because mainstream supply/demand statistics have already accounted for all
the gold. What mainstream statistics do not account for is leased gold that,
by some estimates, has averaged over 1,500 tonnes per year, when mine supply
has averaged 2,800 tonnes per year. In addition, the US Geological Survey
shows annual exports of about 700 tonnes over mine supply. This amount of
gold can only come from aboveground central bank holdings. When China makes
their announcement it will seriously undermine the credibility of Western
central banks, and bring into question how much gold, and how many gold IOUs,
they hold. In 2002 Frank Veneroso estimated that central banks only held
about 16,000 tonnes vs the 32,000 tonnes they claimed. Recently Don Popescu
provided a detailed analysis in "How Much
Gold is on Loan Worldwide?".
While many think that this manipulation of the gold price makes any
investment in gold a losing proposition, the reality is that when the
manipulation can no longer be sustained, gold will skyrocket as the public
loses confidence in fiat currencies. Paul de Sousa discusses this in a video
presentation, "Why
the Manipulation of Gold is the Greatest Investment Opportunity of this
Century."
What should investors do - believe the government statistics and
mainstream propaganda? Do they have the strength to challenge the propaganda
and change their mindset, or will they simply follow the herd over the cliff
at the next financial crisis? Today, being without gold in a portfolio is
like not having flood insurance when the hurricane is bearing down on you.
There are a host of events that could topple the world economy's delicate
balance: Geopolitical concerns; a bubble in the DOW, the strength of which is
based solely on Federal Reserve policy, unsustainable stock buybacks and
financial engineering; derivatives at the major banks that have grown by
about 54% from $450 trillion in 2007 to $691 trillion by the second quarter
of 2014. Of course, corporate debt around the world may be the trigger for
the next financial crisis. In "The
Biggest Economic Story Going into 2015 is Not Oil", Raul Ilargi
Meijer discusses the corporate debt around the world, and the vulnerabilities
it causes.
With all of these vulnerabilities it goes without saying that, in order to
reduce risk and improve returns, a diversified, balanced portfolio is the best
way to preserve capital. Yet most portfolios are neither balanced nor
diversified, and contain only three of the six asset classes of cash, stocks,
bonds, real estate, commodities and precious metals. Precious metals have the
least correlation to financial assets such as stocks and bonds, and provide
the greatest protection for the least amount of allocation. Standard
Deviation, the Sharpe Ratio and the Sortino Ratio are improved, and adding
gold reduces the number of years with losses, and average loss. A traditional
US portfolio of 60% stocks and 40% bonds would have yielded 10.5% over the
last 43 years, with volatility of 12.8%. A portfolio that included a 20%
allocation to gold would have yielded 10.8% return, with a significantly
reduced volatility of 9.2%. In Canada, a traditional portfolio would have
yielded 10.2% return, with 11.4% volatility, while one with 20% gold would
have yielded 10.4% again a significantly lower volatility of 9.8%.
