Three weeks ago, the investing public was awarded a
brief glimpse into the mysterious world of central banking through events in Cyprus.
Despite the official assurances by IMF head Christine Lagarde
that this was an anomaly, a one-time expropriation of investor savings, it is
now clear that the situation is far more serious than originally acknowledged
and that the Cyprus style
"bail-in" will likely be used as a template for other
distressed banks. News soon circulated that Cyprus's gold reserves will be seized
as part of the plan. Rumors rapidly spread that other troubled countries
would also be forced to sell
their gold .
Central banking has always been a highly secretive,
subterranean affair that has led to many conspiracy theories. Until the
advent of the Internet and the light it has shed on this dark room, most of
the world believed the Federal Reserve was a government agency rather than a
privately owned bank, for example. Former Congressman Dr. Ron Paul was largely
responsible for clearing up this mystery. As discussed in my previous
commentary on the subject, Cyprus gave us an important glimpse of the three great secrets
central bankers would prefer to keep in the dark: The loss of purchasing
power brought about through inflation, debasement and financial repression;
the loss of investor confidence in the fiat model and in government and
banking policies that support it; and the importance of uncompromised bullion
ownership. The attack on gold and silver further supports this premise rather
than weakens it, but arriving at this conclusion takes more than superficial,
reactionary analysis.
Central bank activity is a mystery that we can best
attempt to solve through studying clues and through asking
questions--particularly the question "Cui bono" meaning literally,
"a benefit to whom?" After gold lost $84 an ounce last Friday and
silver lost $1.81, we can conclude the beneficiaries were not gold or silver
investors who panicked and sold, but rather those who are fighting to
preserve the reputation of the U.S. dollar and the fiat currency model that
underpins the global economy.
As with all things central bank-related, we can only
speculate and conjecture. This is the purpose of this commentary. It is a
worthwhile exercise because the most effective way to gain confidence in our
investment strategy, which is now becoming a survival strategy, is through
the sincere pursuit of economic/geopolitical truth. Otherwise, we will let
our emotions rule our investment decisions and we will inevitably panic and
sell our holdings out of fear and confusion.
Have gold and silver fundamentals deteriorated? No. Not
in the least. There has been some technical damage and, of course, a
temporary weakness in investor sentiment, but the global debt and the loss of
purchasing power of fiat currencies, the main drivers of the price of gold,
are still increasing by the day. Unemployment is still rising globally. There
are still forty-eight million Americans dependent on food stamps. Employment
participation is falling. Oil prices are still rising. Ten thousand baby
boomers are retiring daily, putting further stress on government pensions.
The debt ceiling debate that caused the gold price to rise 30 percent in two
months has not been resolved and will soon be revisited. Gold production rose
only nominally over the past decade despite the rise in precious metals
prices. A detailed analysis of precious metals' fundamentals show they have
only strengthened, not weakened. There is obviously
more to this story and, thanks to the Internet, we no longer need to wait for
months to gain some clarity, as we might have a few decades ago.
Following Friday's takedown, several reports appeared
on King World News and through Jim Sinclair's website stating this was a
COMEX paper sale and that the physical gold market was tighter than ever as coin purchases and
physical bullion sales soared in response. One commentator, Dr. Paul Craig
Roberts, former Assistant Secretary of the Treasury for Economic Policy under
President Reagan, did not mince words. He stated unequivocally that this
attack was planned and quarterbacked by the Federal Reserve.
"This is an orchestration (the smash in gold).
It's been going on now from the beginning of April. Brokerage houses told
their individual clients the word was out that hedge funds and institutional
investors were going to be dumping gold and that they should get out in advance."
As Dr.
Roberts, like Dr. Paul had decades of first-hand experience working
directly for the U.S. government, his words deserve a great deal of respect
and should certainly serve as a starting point for anyone who sincerely
wishes to get to the bottom of the mystery of gold's recent price
performance.
Bill Downey of Financial Trends, a website dedicated to
the price analysis of gold and silver, produced a thorough explanation of
exactly how this takedown
was carried out. His detailed breakdown shows the event was planned in
detail, executed flawlessly and even involved locking up the physical market
to increase the likelihood that physical buyers, with no other option for
selling were forced to protect themselves through adding short positions
purchased through the paper market, which was of course still open. His
analysis leaves little doubt that this entire was orchestrated by the Fed.
Solving a mystery also involves looking for recurring
patterns in both behaviour and possible motive. So
far one policy, one motive and one group of beneficiaries stand out
conspicuously above all others. This is the policy of financial repression,
the motive being the protection of the U.S. dollar as a safe-haven reserve
currency and, of course, the central bankers, the government officials, the
financial services industry and even much of the financial media who benefit
most from a lower gold price and stronger dollar.
Naturally, the first question a vigilant gold watcher
might ask is how do central banks benefit from a lower gold price when they
bought more gold in 2012 than they have in any single year since 1964? This
may be the most important clue derived from last week's gold takedown.
We know that China has been buying gold at a record
pace. The country leads the world in domestic production and all of that gold
remains in China. In the past Chinese sovereign wealth funds, less restricted
by official red tape and far less transparent in their activities than the
People's Bank of China, have accumulated vast amounts of gold then moved this
gold into "official reserves" years after the fact. One story,
published in 2009, indicated that the Chinese central bank has a target of 10,000 tonnes,
which would give it the most gold of any country and would greatly assist its
goal of eventually competing with the U.S. dollar for reserve currency
status.
The Chinese government can plan in terms of five and
ten years at a time, as they do not face the fear of elections every couple
of years as U.S. politicians do. It is also very aware of the investor
sentiment amongst its population. The government has strongly encouraged the
Chinese public to buy physical bullion and has implemented changes to
facilitate this program. It is logical to expect it will prevent the gold
price from to falling too much further. One surprise announcement about
Chinese central bank gold purchases over the past few years could move gold
prices back to record territory overnight.
On the other hand, Western central banks are also just
as anxious to own more gold for other more complex and more disingenuous
reasons. One clue was provided in January, when Germany's Bundesbank
attempted to repatriate 300 tonnes of gold from the
vaults of the New York Fed, only to be told it would take seven years. Gold
watchers have long contended that the gold held in the U.S. vaults has been
hypothecated and re-hypothecated so many times as a result of complex lease
agreements that there may be many claims on whatever gold exists in the New
York Fed and in Fort Knox. Since there has not been an official audit of this
gold since 1953, only a hastily prepared report in response to a barrage of
questions following the Bundesbank request, many
are speculating that the Fed is also desperately competing for new supplies
of physical gold to meet commitments.
The Internet has also made it possible for truth seekers
to understand the complex policy of financial repression that explains the
current historically low negative real interest rates, restrictions that
appear to benefit government and banks at the expense of pensioners and
savers and the desperate need to shake people out of gold and savings and
into the stock markets. Financial repression is a policy that explains the
"why" of this mystery. A thorough investigation of financial
repression can be gleaned from such documents as the NBER working paper, The
Liquidation of Government Debt by Carmen M. Reinhart and M. Belen Sbrancia or the exhaustive work of financial analyst
Gordon T. Long.
Through such investigation we will find that, just as
Cyprus revealed bank depositors are viewed as "unsecured creditors"
by the central banks, financial repression teaches us that pensioners and
savers are viewed as a direct source of funding for government debt and are
the victims rather than the beneficiaries of such government policies. The
global fiat- or debt-based model that has existed since President Nixon
removed the U.S. dollar's final international peg with gold in 1971 is in
many ways the polar opposite to the value-based model that exists when a
currency is pegged in some way to gold. Although most pensioners were brought
up to believe that debt is bad, that saving and living within one's means is
virtuous, in the bizarre world of fiat debt-based finance, the opposite is
true.
Mounting debts are becoming unsustainable at
government, business and personal levels, and must be addressed. Yet the fiat
reality has spoiled Western investors, and direct taxation and austerity
measures are a Western politician's guarantee of removal from public office.
Therefore, indirect taxation, rules that make assumption of government debt
through mandatory Treasury purchases by large funds,
and debt reduction through currency debasement are the preferred option for
reducing debt. All of these policies rob taxpayers and punish savers.
Precious metals are the one asset class that still
remains beyond the control of central bankers and government policy makers.
Precious metals are limited in supply and, although the paper market has
demonstrated its ability to temporarily affect the price of gold and silver,
it cannot change the fundamentals. Precious metals paper instruments such as
ETF shares, mining shares and futures and options sustained even more damage
during this longest correction in gold since 2000. Those who continue to own
bullion to which they hold title are unaffected. Their holdings still retain
purchasing power even while government policies decimate the purchasing power
of paper currencies. An ounce of gold will still buy approximately the same
number of loaves of bread as it would have in Biblical times.
There is another unexpected consequence of currency
debasement that might also be responsible for this desperate campaign against
gold. Japan's decision to win the "race to debase" has resulted in
unprecedented Japanese gold
buying as the yen weakens against the yellow metal. As several
commentators have noticed, the gold war has become a battle of titans as vast
amounts of Eastern capital challenges Western capital for the limited supply
of physical gold.
Another clue is provided by the spate of new
China-centric trade alliances that seek to circumvent the U.S. dollar.
Brazil, Russia, India, China, South Africa and now Australia are all moving
towards multi-billion dollar trade agreements that will bypass the use of the
U.S. dollar completely. This is a significant threat to the U.S. dollar's
global hegemony and a direct threat to the policy of financial repression, as
this alone could force interest rates higher. By one account a single-point
move in official inflation could add a trillion dollars to the outstanding
U.S. debt because of indexed pensions and other unfunded government
liabilities. This is another reason gold, the only true threat to paper
currencies, and a much clearer indication of true inflation than doctored
government CPI figures, must be discredited through price depreciation.
Financial repression is all about control of
information. The well-timed, coordinated torrent of gold-negative reports such
as those from Goldman Sachs and Societe Generale's The end of the gold era, each warning
investors to flee the gold market, were highly suspicious examples of their
cozy relationship with the central banks.
I realize that many in the gold community would like to
place blame on a small group of bankers or elites who are secretly planning a
New World Order over which they will rule. Unfortunately, such talk is easy
to ridicule. In truth, we are simply following the laws of nature, whereby
highly advanced organisms seek to cooperate to increase their power.
Mussolini famously stated that fascism should be called corporatism, as it is
the joining of governments and corporations. This may be uncomfortably close
to the truth, since the past four decades have seen laws passed and changed
to the point that the line between Wall Street and Washington is almost
indiscernible. Never before, other than during world wars, have Western
democracies appeared to practice such strong policies of perception
management. Mass media has aided this cause significantly, which is another
reason truth seekers should explore each clue, each brief glimmer of light
provided by events like Cyprus and the recent takedown of gold.
Wealth protection through precious metals bullion
ownership is a long-term plan. The gold bull is known for its ability to
violently shake off its back those who harbour even
a modicum of doubt as it moves towards its eventual goal. I firmly believe
that goal will be in five figures before all is said and done, and the world
is once again on solid financial footing.
This mirror-image chart pattern occurred during the
last great run-up in gold between 1968 and 1980. Gold rose from $35 an ounce
in 1968 to $195 an ounce on December 27, 1974, only to fall back violently to
$103.50 an ounce on August 25, 1976. This represents a 43.4 percent drop in
price during this period. Twenty months of price declines were too much for
most gold investors, and many exited vowing never to return. The wily bull
then reversed course and charged up to $850 over the next three years. Most
missed this run. The pattern is eerily similar to what is happening today.
Even the correction period is almost identical in length of time. Gold
would have to correct back to $1,000 an ounce to fit the pattern, but if it
were to match the ensuing rise of 900 percent from its low, it will reach our
projected figure of $10,000 an ounce.
On days like last Friday, we can only remind our
clients and readers that it is best to do what central banks are doing and
not what they are saying. They are buying physical bullion while they tell us
the gold bull is over and it's time to return to stocks. Asian countries that
have experienced the destruction, the rapidity and the surprise of currency
crises hold physical bullion as the ultimate insurance policy. They pay
little attention to price movement and, as coin sales and physical buying
last week indicated, are wise to the Western central banker's clandestine
motives and policies.
To build sufficient confidence to maintain our precious
metals holdings requires years of study and the willingness to broaden our
perspective significantly. It also requires the ability to think objectively
and independently--to reserve judgment perhaps for years until we have
weighed all of the facts. I call this approach "expanded" thinking
rather than positive thinking, and it is the reason I dedicated several years
to writing my upcoming book, $10,000 Gold.
We need to look at the real cause of debt. We need to
understand the mechanics of the fiat currency model, of fractional reserve
banking, of the raging currency war, of the battle for reserve currency
status and the insidious policy of financial repression. We also need to
believe that we can survive as sovereign individuals and protect our family's
wealth in a world that seems intent on taking that God-given right away from
us.
We remind our readers that despite these attacks and
negative campaigns against gold, all sides in this war for reserve currency
status seek one common goal--the accumulation of as much physical gold as
possible. Central bank buying is proof of this. In such a war, gold's natural
direction will continue to be up, not down
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